Every Crisis teaches you a lesson
A year has passed by when the pandemic erupted and there seems to be no end to the crisis as 2nd wave has taken India by surprise. The FY 20-21 has been an exemplary year for all of us which has given many learning as it has been challenging, disruptive and unpredictable. The year past by has been the toughest year for the investors where all boundaries of imagination and forecast have been breached. BSE index which corrected over 30% to hit low of 25981.24 but in a span of 11 months it peaked to 52154.13 thus it has taught many lessons which would hold good for years to come by. This should change investor behaviour at least for short term to medium term if not permanently as human memory is short to understand the rationality of long term planning. The important lessons learnt could describe as follows:
Key learning’s from FY 20-21
Saving keeping liquidity is important: The important aspect of the pandemic which has taught everyone including youngsters the importance of savings. The financial savings has scored higher than any other form of saving because of its nature of liquidity and flexibility. The situation like this gives the hindsight to the investors that illiquid assets like physical assets i.e. properties both commercial and residential don’t give you immediate liquidity in crisis. The power of financial assets have proved his value and the lesson the pandemic has taught that right balance between Financial assets and Physical assets should be evaluated so as the portfolio structure of the family savings should not make you “Asset rich Liquidity Poor” The year taught us that having liquidity (ability to get the cash back) is an important factor in the decision-making while we plan our investments. Many have experienced assets like Mutual Funds have given liquidity in 2-3 days in their hay days.
Prioritise ‘needs’ over ‘wants’: The world has understood another aspect of life that one should understand the difference between need and wants. People had preferred EMIs over savings which has proved costly after the job lost, cut in salaries and losses in business. The year taught us that just to maintain a lifestyle; over-leveraging oneself is an imprudent choice. Too much EMI as a percentage of what one earns is detrimental to one’s financial health and one should prioritise expenses while taking loans as it hits during such crisis.
Importance of Asset Allocation: The asset allocation has not been understood earlier by many than in these uncertain times. Mix of Equity, Debt and Gold gives an ideal stability to the portfolios where one asset has witnessed both outperformance and underperformance at different times. Equity crashed, debt saw unimaginable crisis and gold saw a volatility. All assets have seen its peak returns inspite of meltdown and credit crisis. It taught us why investing across asset classes based on the risk profile of every individual is important in the long run.
Panic dissuades you from long term Planning: Panic in investments make you lose focus and bring hindrances to the journey of financial planning. We have seen in past the crisis of 2008 where investors panicked to miss all time high returns and similarly 2020 crash has led to another such experience where investors panicked and lost a chance to make returns from a seemingly V shape recovery in a span of year. The worst was that the stopping of SIP has been detrimental to financial planning as irrational fears of losing money defy the logic behind running SIP. A few very good months (For example Apr’20 to Feb’21) can dramatically change the past returns and also taught us that cost averaging and the power of compounding work to the investors' benefit in the long run.
One shouldn’t get carried away with Bull Run: The bull phase in the market has caught everyone by surprise as liquidity driven market gave a V shape recovery. The youngsters with no background have found a new avenue of making fast money. There has been record fresh Demat account being opened in last one year during the Bull Run. However, investors have got swayed by optimism getting carried away with the abnormal returns in the market. This leaves with a lesson to learn that one should stick to the basics of investing as per the financial goals especially when markets are surging or hitting the bottom. One must not try to time the market and should spend ‘time’ through participation in the market to build wealth.
Health & Life Insurance is a necessity:Two aspects of life couldn’t have been learnt harder way than in this pandemic- Health and Term Plan (Life Insurance). Both products are two side of coin which needs to go along with all financial plans to safe guard the accumulation of wealth. Arm yourself with adequate and sensible cover for the unfortunate eventualities for yourself and your loved ones. The important part of life is evaluated casually till one has to make use of the same. Old Generation Health Policies can hit hard on your pocket if features aren’t understood similarly insufficient Insurance Plan can make life difficult for the family, thus a suitable Sum Assured by way of term plan should part of Financial Plan.
Millennial needs to learn right way of Investing: The earning youngster who have experienced may be their 1st year of uncertainty have also understood the importance of savings. In the age of technology where the understanding of investment is made through digitally as all the information you need to know at your disposal. However, in-person through professionals who are equipped to provide you with suitable solution and handhold you in turbulent times is equally important. Thus, millennial needs to evaluate the understanding of investing as it is long and bumpy journey to ride which will involve time and energy at all levels to be successful in achieving your goals.
Every Crisis give us learning and this year would be remembered as game changer the way people would invest. We must take teachings and treasure of our learning’s, because a year like this does not come often. Stay invested, stay disciplined, don't go by hearsays, and seek qualified advice before embarking on the investment journey.