The COVID-19 pandemic has wreaked havoc across the world, with close to 2.5 million cases in over 200 countries and territories. It has claimed numerous human lives so far and continues to spread like wildfire. Apart from creating a public health crisis, the impact of this viral outbreak on the global economy has been colossal. Several industries have come to a screeching halt, whereas the rest are operating with limited capacities. Sectors like travel, aviation, hospitality, logistics and retail have taken the hardest hit, but others are also facing huge disruptions in the wake of the COVID-19 crisis.
Against this backdrop, businesses are leaving no stones unturned to stem their losses. Companies are asking employees to take pay cuts, or in some cases, have decided to lay off staff. While this is a challenging situation to be in, it’s important that you get accustomed to the new normal. With reduced or no income, you need to re-evaluate your investments and make the best possible decisions. Here are some tips that will help you weather the coronavirus storm and emerge stronger.
1. Create a safety net
It’s crucial to have an emergency fund that can cover your basic living expenses, including rent, food and utility bills. You should build an emergency fund to take care of at least 4-6 months’ worth of your expenses. This will serve as a financial cushion when the money is not flowing in. The best way to do this is to take small portions of your income, ideally 10-15%, and put it in an FD or a liquid mutual fund. If you have been making other investments (e.g. for retirement or tax saving), it would be better to redirect them towards your emergency fund till it’s complete. In case, you’ve already lost your job, take some cash out of your retirement savings and allocate it towards emergencies. While not advisable, it will keep you afloat during these trying times.
2. Reassess your risk profile
If the market volatility has taken a toll on your mental health, chances are high that you’ve been making investments beyond your risk tolerance. Take this time to sit back and reflect on the level of risk you can afford to take right now (in future also you should stick to the same risk level). Keep in mind the possibility of limited or no cash flow in future for 6 months. You should also reassess your current portfolio allocation and bring it in line with your risk profile. This could mean selling off equity investments that are no longer part of your revised risk profile.
3. Don’t try and time the market
This is one of those times where you will feel stupid no matter what you do. A market in decline can be very volatile and there could be huge swings both ways. Don’t let these swings dictate your investment decisions. Assume markets will take 12 months to recover and plan your investments accordingly. Also try and stay away from investing directly in stocks especially those who have declined a lot even though it may look tempting. Large cap mutual funds that invest in bluechip stocks should be the preferred mode of investment as they will be the most resilient to any economic crisis.
4. Avoid changing your strategy overnight
Financial experts advise against formulating a completely new investment strategy in a bear market because generally the changes are driven by emotions and not logic. If you had put a plan in place, re-visit the inputs to the plan e.g. your monthly savings, your risk profile etc rather than changing the strategy itself. Of course, it’s only natural to feel overwhelmed by the situation and to let go of the basic principles of investment but try not to give in. Seek professional financial guidance if you need because decisions made during such times are the ones that will matter the most.
5. Don’t take the exit route just yet
Instead of exiting in a panic, re-evaluate your investments. Build a quality portfolio that you are not afraid of holding through a crisis – it could just be an index fund for example. But find means of staying invested – in line with your risk profile – rather than exiting completely. Selling stocks or mutual funds now to buy it cheaper later is a mirage. Most of the people who think so almost always end up buying it higher than they sold it for.
Remember, markets are driven by greed and fear. Your investments should not be.