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Don’t panic, stay invested: What to keep in mind for your money during Covid-19 outbreak
The consequences of a pandemic spreading and disrupting business earnings is a factor hard to model into earnings excel sheets at the moment. Given this unknown, the extent of the market correction too remains unclear. No one can control the markets, but investors can shape their own reactions and decide what to do with their money -- or, more importantly, what not to do.
Domestic equity markets have corrected 32% since the start of this month. This sharp correction has not spared anyone. Not only are stock prices down 20%-30%, but the return on a 10-year diversified equity mutual fund SIP has most likely fallen to low single digits and return on a similar SIP for a five-year period is probably in negative territory.
Now what? Is it time to sell or is it time to start a buying frenzy at lower prices?
Undeniably, equity market across the globe were overvalued not so long ago. This means a correction in prices can be viewed as what market experts term a mean reversion or a move towards rational stock prices. One of the triggers for this sharp correction is really an unknown variable -- like Covid-19. The consequences of a pandemic spreading and disrupting business earnings is a factor hard to model into earnings excel sheets at the moment. Given this unknown, the extent of the market correction too remains unclear.
No one can control the markets, but investors can shape their own reactions and decide what to do with their money -- or, more importantly, what not to do.
For starters, here’s what investors should not do.
1. Give in to the urge to act immediately: Any action taken on investment portfolios now will most likely be out of a sense of urgency to match the pace of the market. Ideally, there needs be no change in long-term equity investments; historical data shows that the time and pace of recovery, just like that of a slump cannot be predicted. According to Ashok Kumar, co-founder and chief executive officer, Scripbox, an online investment service: “Selling now makes temporary losses permanent. There is no need to do that if you don’t have a cash flow emergency.”
Equity investing means owning companies through listed shares, unless survival of businesses is being questioned, stay invested.
Bottomline: don’t try and time the market; stay invested.
2. Check portfolio values daily: This is just likely to cause more heartache. The loss in value will look bigger. And seeing red marks will enhance the urge to act now. Kumar suggests people tap experts: “There is a rational part and an emotional part, at this point need to handle both parts equally well because people are looking for answers on both ends. Just like a doctor is more important for medical reports rather than the individual seeing them, it is important that individuals don’t look at their own portfolios and panic. Seek expert opinion where needed.”
3. Buy seemingly cheap stocks: Investors should not start buying in a rush, because the trigger is an unknown variable. In a panic correction, the good and the bad go down just as swiftly. It’s only when the recovery begins that quality starts to reflect; don’t invest in something which does not recover with the market.
And here’s what they should do
This is not to say that investors sit tight and do nothing. There is merit in using this time to reassess one of the most important aspects of market-linked investing -- asset allocation. Investors who can’t stomach the sharp fall and find the anxiety too much to bear, should reconsider their overall allocation to equity assets.
1. Continue regular investments: The best action is to continue investing regularly in small amounts which will enable investors to take advantage of lower prices. It is hard to say how long the correction will continue; regular buying will give people entry at all lower levels. This is important because it will help long-term returns keep pace with inflation and also match expectations set at the start.
According to Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisor: “The starting point is always one’s financial goals. If the goals haven’t gotten advanced there is no need to change the portfolio or the regular investments even if past returns look poor. Key is to look forward rather than to the past.”
2. Stagger lump-sum buying: This is related to the first. With lump sums or cash surplus, people should think about buying a little at a time. The market correction can carry on for longer than people think; in the 2008 market correction, the bottom was hit three times. If someone had invested all the surplus the first time, they might have been left with no dry powder
3. Focus on quality: What people buy is equally important. Both in stocks and funds, the focus should be quality and consistency. Funds which have shown consistent long-term returns rather than the best returns, and come from asset management companies with well-established investment and risk processes, should be the first choice. In the case of stocks, people should focus on quality of management, quality of balance sheets and consistent earnings growth. Rather than buying what looks cheap, investors should buy good quality at a low price. Dhawan also recommends building globally diversified portfolios.
Beyond the investment portfolio
In extraordinary times, most investors face a double whammy -- poorly performing portfolios and lower cash flow from business or salaries. This is not the time to plan expensive holidays and birthday celebrations; instead people should start thinking of cutting back on surplus spending over the next few months.Indeed, it’s time to save more.
In an economy driven by credit, there are many who have housing loans, car loans and even loans for consumer durables. At times such as these, investors should try and move away from credit altogether. Salary increments and bonuses can’t be taken for granted and with lower income, the ability to repay loans will decline too. Those with large loans such as mortgages should ensure they have enough cash flow to keep paying instalments.
Dhawan says: “In our conversations with clients if we find there is a job risk and at the same time there is a housing loan to be repaid, there could be a need to deliberately buffer emergency funds. Ideally, one should not stop regular investments into equity (mutual funds), but in certain cases it may be required to look at stopping monthly investments to shore up loan repayments. This is especially relevant for single-income families where the sole earner faces a risk to continued employment.”
This elevation of risk in both capital markets and the real economy as a result of Covid-19 underlines the importance of two basic safeguards of investing. First, everyone needs an emergency fund. An emergency fund should provide for six to 12 months of daily expenses including rent, school fees, and housing loan repayments. Second, everyone needs an asset allocation plan that is made for them.
For those who have neither, this is the time to set that right.
(Lisa Pallavi Barbora is a personal finance writer who covers the topic on the website www.moneypuzzle.in)
