Hindsight is 20/20
While 20/20 refers to clear vision, hindsight refers to a clearer understanding of a past event. But, considering its meaning and the actual happening in the year 2020, this expression is now more eye-opening than ever before. Words like unprecedented, mask up, remote working, ‘workcation’ or even ones like ‘anthropause’ have made their way into lives across the globe. Innate to human nature, we have learned to navigate through this perilous pandemic and its consequential impacts, but not without learning some crucial lessons on the way.
If we have learned to strike a balance between work and family life, have learned to manage time better, and have understood how to make do with what we have then these are the few life lessons 2020 has taught us.
But, have we focussed on what are the financial lessons 2020 teaches us? Well, here are a few points to ponder:
You can never predict the future
Let alone the arrival of the pandemic, could you have ever predicted the behavior of the Indian stock market during this year? I bet nobody could have. The brief plunge to approximately 25k and quick uptick crossing the 50k threshold took even veteran investors by surprise. There were whispers in the hallways of people waiting to push in their investible surplus when the market falls again, something they sounded cocksure of. For those who thought they could be smart and time the market to make a few extra bucks, they were in for a rude shock. This only goes to prove just like life, the stock market is equally unpredictable.
If you are in for the long run, invest wisely. Create a proper financial plan based on your goals and your risk appetite. Avoid timing the market and instead choose to invest time in the market. Avoid going all-in on a hunch, be prudent with your hard-earned money by making informed decisions, invest in a staggered manner, and for best results stick to a thoroughly sketched out financial plan.
To diversify or not to diversify
If you were one of those investors who chose to listen to good financial advice and invested carefully across varied instruments, then you deserve a pat on your back. Investors with lopsided portfolios, especially those invested heavily in physical assets alone like real-estate or gold (together which account for approx. 92.57% of physical assets investments held by Indian investors) or solely in traditional instruments like FDs, etc. may have seen their portfolios tank. Fall in interest rates and fall in demand for physical assets during the pandemic proved how a diversified portfolio with a healthy mix of physical and financial assets is a must.
In emergencies, liquidity is king
Even before and through the crisis we have harped on the need for an emergency fund. Investors who are dependent on their monthly income and lack alternative sources of passive income could have felt the need to bank on an emergency fund in times when their salaries were cut or businesses did not perform well. Investors who lacked an emergency fund but were lucky enough to have invested in liquid instruments like gold, mutual funds, or even direct equity may have had some income source to fall back on. If you do not have an emergency fund, stop investing and first direct your income towards building a robust corpus that will suffice the sum of 3 to 6 months of your expenses. Park this corpus in a liquid fund that can be easily accessed within a maximum of 48hours of an emergency.
Ensure you are insured
There is no better feeling than security. To know that no matter what unpredictable situation you may be served with that you are financially secured to withstand the blows, is what will see you through a testing time. Term insurance, healthcare, or even business insurance are a priority and should be undertaken after thoroughly understanding your amount of coverage needed along with the contract’s policy for indemnity clause.
While these are a few tips to ensure your investments remain on track and you achieve your financial goals here are a few tips to make sure your investment portfolio performs well:
- Know what is in your portfolio: Spend time to do a little research or take the advice of an expert to understand the underlying investments in your portfolio. Understanding your portfolio will help you mitigate risks and assist you to make informed decisions in the future.
- Pay attention to laggards: What’s dragging your portfolio down? Keep a keen eye on the laggards in your investment and make sure you find ways to deal with them without putting your capital at risk.
- Rebalance proactively: Rebalancing cannot be a ‘once a year’ timed activity. Especially when volatility strikes the financial market that is when investors must take a look at their portfolios and rebalance them to ensure it remains stable.
- Stick to the plan: While our plans may constantly change our ultimate goals remain constant. For long-term investments, investors need to ensure they stick to their financial plans which are aligned to achieve their goals.
The financial year 2021 could bring with it its own bag of surprises. Don’t let your mistakes in the past derail your financial investments for tomorrow.
Stay safe and stay invested.