How to secure investments in these uncertain times
Given that the uncertainty will hang heavy for a while, portfolio rebalancing is the need of the hour. Once the investor has decided on a certain asset allocation, they should stay with it till their circumstances change.Updated: Oct 28, 2020, 19:31 IST
Barring a small chunk of the population, for most people the coronavirus pandemic has been a nightmare with a domino effect. Besides, the staggering human toll, the economic damage has left millions staring at unemployment and disrupted income streams due to which people have been forced to tap into their financial reservoirs to make ends meet.
All this has caused a drastic shift in goals and has necessitated changes in investment strategies for majority of investors. While lockdown restrictions are being lifted across the globe, the prospects of recovery remain far from even, according to the International Monetary Fund. Until the world economy continues to battle the invisible enemy, managing risks and protecting their wealth will remain a major concern for investors in the near future.
Given that the uncertainty will hang heavy for a while, portfolio rebalancing is the need of the hour. Once the investor has decided on an asset allocation that works for them, they should stay with it till their circumstances change. For this, the portfolio has to be regularly rebalanced. This involves trimming exposure to the asset class that has run up, and buying more of the asset class whose value has declined. Rebalancing makes you buy when markets are low and sell and book profits when prices have run up. This puts the spotlight on the opportunity that a falling market provides, rather than the loss in value.
Mapping current pain points with requirements and security
Besides the grim condition of global markets and the fear of contracting the infection and being burdened under a mountain of medical expenses, there are various other challenges that are unique to each investor and are closely linked to their age and situations in life.
Priyanka Iyer, a freelance journalist based in Vijayawada says, “Covid-19 has redefined uncertainty, especially for gig workers like me. Work opportunities have reduced and so has the income. Earlier, I used to be okay with diving into my savings to splurge once in a while. That has changed and the priority is to ensure that I maintain a reservoir for unanticipated storms. However, I am having troubles routinely saving money and compartmentalizing it for various goals.”
For many of those who have been fortunate enough to not have to deal with dwindling incomes, existing minor financial troubles have crystallised into major risks. Shweta Singh, an owner of a small business in Gurgaon says, “This pandemic has taught me that less dependency on loans would be the way forward. Managing debt has been my biggest challenge in the last few months, so much so that at one point in time I did not have enough cash to pay away my loans. This is also the reason why I am not investing in any high-risk financial instruments till the situation recovers.”
The Balancing Act
In an unpredictable market, many are also tempted to take advantage of the opportunities that a declining market offers. They do not assess their capability to manage dealing with this volatility. Knee-jerk reactions can do more harm than good at this juncture. It is best to stick to the basics and follow the process of asset allocation, portfolio selection and rebalancing keeping your goals and risk profile in focus.
Nitin Rao, the CEO of InCred Wealth, suggests leaning on debt more than on equities in the short-term as equities are inherently riskier than debt. He says, “For the next one year, depending on liquidity requirement, the planning will have to be done differently than originally envisaged. Since valuations in the stock markets are still high, money can be moved to debt for the short term needs. For the time horizon more than three years, equity allocations can be held on to with regular rebalancing. International diversification becomes important for the long term to benefit from global growth stories regardless of domestic hiccups.”
Vikas Gupta, CEO at Omniscience Capital advocated diversifying across India and US equity and debt instrument as a risk management strategy besides small allocations in gold. He says, “Irrespective of whether one’s income streams have been disrupted or not, extra effort should be made towards growing your emergency fund. Investing in US equities can be a good diversification strategy and so is restricting investments in companies that are established and have little or no debt. These strategies ensure divergence in performance of these asset classes. So, in times of need one can encash the investments, which have performed well.”
(This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life AMC)