Your Money: Do you have a cashflow for next 12-18 months?

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Published: April 7, 2020 1:30:01 AM

In a single day, there was a double-digit fall of 13.2% in Sensex—unprecedented in the past 16 years.

Having a cash flow for the next 12-18 months, should be your first and foremost critieria. Having a cash flow for the next 12-18 months, should be your first and foremost critieria.

The 30-share BSE Sensex is down more than 30% since January this year. This March it fell by more than 23%— the steepest ever fall in a month, since October of 2008 when it fell by nearly 24%. The stocks in mid-cap and small-cap witnessed an even steeper fall, exceeding 40-50% of the portfolio value.

There is a fear now. And it is normal. Very few of us would want to even have a look at the portfolio. But we cannot afford to be an ostrich. We need to approach fearlessly. But it is easier said than done. In a single day, there was a double-digit fall of 13.2% in Sensex—unprecedented in the past 16 years. On May 17, 2004, the Sensex fell by 11% and on October 24, 2008 by little under 11%. Many have not seen such a steep single-day fall ever before.

Reverse to the mean
The devil lies in the details and that’s what we should look out for. Reversing to the mean is the normal and how soon or late normalcy returns is not predictable at this moment. And to tide over it, we need to ask ourselves a few questions.

Did we have a plan, when we were investing? If yes, have we planned for the emergency? Do we have cashflow for the next 36 months? And more importantly, can you as an investor, withstand the value of your holdings going down by another 10% or 20% or even 30% or more.

If the answer is yes then you know what to do. And if the answer is no, then it will be prudent to be safe. Accept the haircut and enter when normalcy returns.

In the event we did not have a plan, what is the recourse and the way forward?
Having a cash flow for the next 12-18 months, should be your first and foremost critieria. And if you need to take the haircut, it would be sensible, as having a cashflow is the most prudent thing. Another fear which we have is —will the market correct more from here? No one knows, but the data point is not encouraging.

With social distancing in place and travel and consumption taking a back seat, the earnings growth in companies for the next few months does not look positive. This could have an impact in the stock prices. And with every government across the globe coming out with a stimulus package, it points to tough times ahead.

To predict the market is to play with fire and the end result most of the time does not lead to the path of success. One should, as an investor, consider buying stocks as being a part-owner in the enterprise. Today, with the portfolio being underwater, one needs to revisit the companies in one’s portfolio. And if they do not qualify, you should take action.

What next
Cash as a resource is the most important asset. We can create wealth, if we have the cashflow. And that’s the most important thing. Do have the cashflow in place and do not let volatility play with your feelings. Keep away from anything that can rob you of a good night’s sleep, it will be prudent to be safe.

The writer is managing partner, BellWether Advisors LLP

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