The Corona scare has not only disrupted normal life, but has resulted in a sharp downfall in stocks across the world. Indian stock markets and other world markets too have declined upto 30% in last few weeks. This has been the sharpest fall in such a short time frame – partly because of the uncertain nature of the beast that we are dealing with (Corona) and partly because of the large algorithmic trades from the developed countries.
Based on our individual personalities, some people will see this event with huge anxiety while some others may see it as an opportunity. Both of them need to take a deep breath first! While we do believe that “this too shall pass”, it is always helpful to take a balanced approach.
Is it time to make fresh investments?
It may be tempting to take advantage of the lower stock prices today. Once the positive outcome in humanity’s fight against Corona (vaccine or natural slowdown) comes into action, we will see a sharp rebound in both economy & stocks. But if the fight lasts longer, it may take a year or two before you see meaningful revival in your investments. Before investing in stocks, make sure you are clear with the three conditions below:
1) Expense buffer – You need to keep 90-180 days of expenditure in your bank account (cash/FD) so that you are comfortable even if virus related lock downs last for six months.
2) Asset allocation – You need to ensure that your financial wealth is spread across asset classes like FDs, Bonds, Stocks and Gold. We have time and again discussed the perils of putting all eggs in one basket. Please get your asset allocation aligned as per your risk profile. Feel free to reach out to us if you need help with this
3) Time frame – Invest only that money in stocks incrementally, which you may not need for next 5 years. It is possible that stocks can fall further even from current levels!
What will happen to the existing investments?
Most of the stocks have declined 30-40% in this fall as investors rush to raise cash. In such situations, markets make no distinction between good & not so good companies. Below is a guide on some common questions:
1) Wasn’t it possible to predict the fall and sell everything before the fall?
Investing is about finding right opportunities and not about making accurate forecasts. Nor do most investors have any special abilities to forecast a sudden crash. The best of investors have always focused on identifying great companies and holding them for many years.
2) Should one sell everything today, so that we can protect future downside?
If you do not have enough buffer to tide over next 3-6 months of expenses or if your salary continuity is at risk, you may have to take out some money. Otherwise, you may just be better off waiting out and riding the recovery as and when it happens.
Another way to think about this is to assume that property prices too have fallen 10-25%. Do we consider selling our house or our shop? Of course not, because we have a long term view here. And we cannot sell it immediately even if we want to due to lack of liquidity. The ability to sell stocks instantly is both a boon & curse.
3) Some insights on reviewing your investments
Never waste a good crisis. Use this time to understand few parameters about your invested companies: a strong balance sheet; interdependence on global trades; leadership position in their micro-market; innovation track record and satisfaction of its customers.
When the dust settles, people will still eat out, drink, shop, socialize and travel. Companies with most of the above characteristics are best placed to weather the impending slowdown and recover from it.
Trivia – Money & Well being
A lot of us spend more than 50% of our day on either earning money or worrying about money or even worse, quarrelling over money. The virus scare can create further anxiety but it also opens doors for newer aspects in life. The other day, I was speaking to a fellow investor who has been in the stock markets for over thirty years. Being true to my expectations, he was much calmer and visibly less perturbed by the market fall and Corona scare.
He started off by saying that he read a lot of positive news in the past two weeks – the drop in global travel and lock downs in many countries has resulted in significantly lower pollution. So much, that dolphins have been spotted in canals of Italy after many years! Further, he suggested there is no need to get worried if you have followed the below rules:
1) Differentiate between “needs” and “desires”
Categorize your expenses into what you absolutely need and what is good to have (but not essential). This will help in arriving at the minimal amount required to maintain a lifestyle. After doing this, most of us will realize that we are in a better financial position than we think. The virus scare may actually give you chance to save some money which would have otherwise been spent on travel, vacations, movies and fine dines.
2) Stress test your finances
Most of us are so busy in our day to day lives that we never get chance to look at our wealth in a holistic manner. We can use this spare time to ponder over these questions:
· Do we have adequate health & life insurance?
· Do we have enough buffer fund (FDs, gold) to last us for 12 months of bad times?
· Do we have a long term financial plan?
These are indeed testing times, but also offer “time” for personal, emotional, social and financial development. Let’s hope that in a few months from now, people will talk more about Corona beer than the virus. 🙂
Feel free to reach out in case you need professional help with your investments!
P.S: Equity as an asset class in extremely rewarding in the long term, however, only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.