The current coronavirus pandemic has caused unprecedented turbulence in the economy and the financial markets. With lockdown measures bringing an unknown future and a monumental slowdown, it is crucial to rethink investment strategies and use ones that are better suited for this instability.
As global uncertainties continue, investors are unsure about what course of action to take. The recent declaration of a ₹20 lakh crore economic package is likely to cut through the standstill in the economy, but the pace of recovery—quick, or long-drawn—remains to be seen.
There is an evident need for self-reflection in financial matters during these times. Do not lose sight of your investment goals, and consider reshuffling your portfolios to better suit the current economic situation. Read on for timeworn tips on how to invest during a recession
Have adequate liquidity for smooth sailing
The primary need of the hour? Securing yourself by building an emergency fund that can support you (and your dependents) for the next 3 to 6 months. Considering the global economic crisis, many may struggle with maintaining a sustainable income. Keeping select liquid assets thus becomes vital to protect yourself from an uncertain future, allowing a comfortable and flexible window for decision making. Once the liquidity requirements are fulfilled, consider investing for a longer time horizon and cash in this fall in the stock markets through a disciplined approach to manage your portfolio. Focus on the present first, before worrying about the future.
Cushion against falls with diversification
The need for diversification to minimize risks has always been advised in investing, but 2020’s volatility underlines the importance of a balanced portfolio to cushion your investments against a potential fall in the markets. Diversify your investments not only within stocks, but also across different financial assets like bonds, gold and real estate to effectively manage risks. This helps retrieve proper returns even after the poor performance of some asset classes. Calm rebalancing of portfolios and staying invested in the markets is always a better option over panicking.
Within this process, make sure you understand your risk profile before deciding the proportions that are allocated for different asset classes. If you are risk-averse, or are nearing your retirement, it is wiser to keep a higher proportion in safer securities like the debt market or gold, since the risk of losing your capital is lower. However, if you are a risk-taker aiming to grab the bull by the horns, go for higher investments in stocks, diversify them after strong research, and make a decision after taking advice from professional fund managers.
The Investment Checklist
If you have already invested in the stock markets, do not panic, and stay invested. Continue with your SIPs to balance out your portfolio with buying at these low levels and get the benefit of rupee cost averaging. Do not try to time the markets to buy at the minimum level. Instead, have discipline in investments through timely buying. Avoid taking large decisions like selling off your stake while investing during a crisis
- Avoid too many transactions
Markets are too uncertain, so avoid over-selling or over-purchasing (or both) just to make profits. In an attempt to catch the bottom of the markets, people tend to make mistakes, and lose out during a continued decline. Refrain from engaging in speculation or trying to cash in the short-term market fluctuations. Instead, go for staggered purchases, and try to hold your investments for a longer duration till the markets and economy are no longer on shaky grounds.
- Scout for strong fundamentals
Markets are expected to rebound after the strong economic stimulus provided by the Indian government
. An effective strategy would be to look for sturdy fundamentals to cash in the irrationally driven down prices in sectors like pharmaceuticals, health and FMCG, which are expected to perform well regardless of difficult times. Avoid sectors like aviation, entertainment, hotels, travel and tourism, auto and auto ancillaries and multiplexes, which are likely to fluctuate, experience the brunt of the economic slowdown, and take a longer time to recover.
- Look at gold and other precious metals
When investing during uncertain times
, gold is widely acknowledged as a slow and steady riser that retains its value when the economy is in the doldrums. In fact, when the market is down, gold prices tend to rise, as people consider it a safe long-term investment option. It is thus advisable to have some of your investments in gold to safeguard your money and secure decent returns.
Land and property shows lower fluctuations and less negative outcomes when it comes to economic recessions. Land is valuable, and the temporary decline in property prices is known to improve when an economy recovers. In this sector, it may be a good idea to invest when property prices are down and more affordable, as they are bound to rise when the economy stabilizes. For an additional in-flow of cash, the property can also be rented out as accommodation.
Greed and fear are said to be the greatest enemies of investment. While making decisions, you should have the courage to overcome the fear of investing when the markets are down, and be able to overcome the greed for bigger returns when the market is rising. While you should normally play to win, err on the side of caution to make the best investments for a possible economic collapse
Combine both these qualities with discipline, and you can reap good returns and minimise risks while investing in the financial markets. Be calm and thorough in your decision making. Continue with your SIPs to get the advantage of rupee cost averaging while buying at low levels. Take professional advice to manage your investments based on a combination of reliable data and domain experience. Factor in these tips to take a fresh look at your financial portfolio. Reshuffle, rebalance, and mark your way forward with the best investments that are fit for a slowly recovering economy.