This is a real test for us as investors. Some of us are getting jittery because we are watching our overall returns deteriorating and some of us are thinking it is an opportunity to add more to our existing portfolio.
As this coronavirus pandemic spreads across the world a lot of sectors are going to get affected. Such events also make stock markets across the world very nervous and this nervousness is pulling the stock markets down. When the stock market goes down the prices of shares get impacted and the value of our portfolios nosedives. Most of us have allocation in equities and we see our portfolio value going down almost every day.
This is a real test for us as investors. Some of us are getting jittery because we are watching our overall returns deteriorating and some of us are thinking it is an opportunity to add more to our existing portfolio. Every individual is different and that is what makes us unique—some see problems while others see opportunity!
There are a few pointers that can help us when it comes to managing things in the current situation.
Keep your contingency fund intact
The purpose of keeping aside the contingency fund (ideally 6 to 12 months of household expenses) in a bank account is to ensure that we sail through any crunch in income or can fulfil a sudden need of money. If the situation becomes worse because of Covid-19 there will be an impact on income of a lot of people. Hence, we should continue to keep our Contingency Fund intact and use it only in case of emergency. For those who plan to use the falling market as an opportunity to add more by investing in stock markets, it is strongly advisable not to consider their Contingency Fund as their surplus to invest.
Sticking to the ideal asset allocation
It is natural that our overall asset allocation has been impacted and the proportion of equity has reduced because of falling markets. In such a scenario, it is better to relook where you are currently investing and if possible, gradually invest in equities to improve the overall allocation to equities. Any new investment in non-equity instruments can be paused and diverted into equities to realign the overall asset allocation. It is important to be disciplined and not to get over excited by thinking about this opportunity or get edgy by shying away from equities because stock markets are falling.
Plan better, when nearing financial goals
We take years to accumulate our corpus for planned financial goals and if your goal is due in tough times like now, there is a massive impact on the overall accumulated amount. We may have to compromise on our financial goal and in the worst-case scenario, we have to either delay it or rely on some other avenue to fulfil the goal. Here the strategy of de-risking the accumulated corpus by withdrawing monthly from risky asset classes like equities and parking it in a savings account or liquid fund can help in reducing the negative impact of the market on the accumulated amount. The withdrawal can start before 12 to 18 months of the goal depending on the accumulated amount. We have to follow this for all our long-term goals in future.
Being disciplined is critical when fear grips the investors and their belief in equities is low and at the time when greed pushes investors to go for equities on every occasion. Keeping contingency funds intact for emergency, sticking to asset allocation, staying aligned with the asset allocation, investing money other than contingency fund which has a holding period of more than two-three years will help sail through the environment created by Covid-19 across the world.
The writer is co-founder, MyWealthGrowth