Let us summarise some of these lessons.
1. Buy and Hold works
Investors should find high-quality companies and hold onto them for as long as possible. Most of the times, the best strategy is to do nothing, if you have invested in such companies. The fact that the portfolio holds high quality companies will provide investors the confidence that the stock would recover quickly when the trajectory of the economy changes.
2. Don’t PANIC
Another lesson that is related to the first one is; Don’t PANIC. Keep CALM. Although it is simply human nature to assume the worst, be aware that market volatility is inevitable, especially during crisis periods. As long as the companies that you have invested in have not seen major or permanent damage to their business models, one can stay invested and actually add to the positions at weaker prices.
Investors need to be comfortable with volatility. Markets are subject to multiple cycles of volatility. Check your risk tolerance once again. If you were comfortable with your investments during the recent market weakness, you may not need any changes to your investments. If you are still biting your finger nails, perhaps it’s time to settle on what investments make you feel comfortable through good times and bad.
3. Consult an expert or a learned/evolved relative or friend
Rather than undergo an emotional rollercoaster on your own, talk to an expert or a learned/evolved friend or relative. This conversation will help you evaluate whether it is worth panicking or staying put. This will assure you that the path you have chosen has the concurrence of somebody whose views you value.
4. Stick to being disciplined
Stick to your plans to invest via SIPs or lumpsum irrespective of market volatility. Do not take liberties or benefit out of this volatility by trying to time your entry points.
With all the market volatility, it can be tempting to try to wait out for a ‘best’ time when the market has steadied and is on a consistent upward trajectory. Well, for people waiting, that boat may have started sailing already.
5. Inject diversification into your portfolio
This will help your portfolio weather all market conditions. Create a balanced, healthy portfolio that can withstand and recover from short-term market shocks.
6. Review
A regular review of your portfolio is important to weed out potential underperformers and add to performing ones. This also helps set right the asset allocation strategy that goes out of whack after a steep runup or fall in asset values. Our portfolios must be updated to reflect the impact of innovation and technology on our lifestyles.
7. Need for Emergency Funds realised
A lot of people underwent turbulence in their finances due to loss of jobs, pay cuts, impact on businesses etc. Emergency funds help meet regular expenses and commitments like EMI and SIP payments at such times.
8. Realise that there is no linear relationship between the Economy and Market
It is important to recognise that the market and economy do not necessarily reflect one another. This is because economic indicators are backwards looking and stock markets are forward-looking. It’s for this reason that stocks rally when things are terrible. It’s for this reason why stocks bottom long before the economic data does.
Also the largest listed corporations may be well-positioned with cash or the resources to pivot their businesses to survive a shock or downturn or recession.
9. Having adequate life insurance and health insurance is a must
On other key lesson from COVID-19 is realising the importance of having adequate life and health cover. Adequate health cover will ensure that the large medical bills are taken care of and do not damage your financial security in any way. The spread of COVID-19 has also made us realize the fragility of life. An untimely death of the family breadwinner can have a debilitating impact on his survivors. Low-cost term policies are the best way to take life insurance cover.
