Even now, as I write to you, many of the headwinds or risks are in play, particularly looming geopolitical tensions, inflation, and the likelihood of a fourth wave of COVID-19 in the ensuing months. That said, here are three key lessons all of us to learn from the first three months of 2022:
Focus on Asset Allocation and Diversify Optimally
In challenging times (and even otherwise), asset allocation will play a pivotal role. When you ensure a correct mix of equity, debt, gold, and even cash, for that matter, to be held in the investment portfolio, it serves as a strategy in itself to reduce the risk and clock optimal returns. It is akin to the idea of “
keeping eggs in different baskets ” introduced to us early in life.
Fundamentally, it is important to recognize that not all asset classes move in the same direction at the same time. Hence, it is pointless getting swayed and skewing your investment only to hoping equities to earn stellar returns as you did in 2020 and 2021. Given the headwinds in play and the impending intense volatility, tone down and set realistic return expectations.
The other asset classes, viz. as debt and gold (investment avenues therein), may also help your investment portfolio clock net positive returns. So, instead of focusing only on generating alpha through an equity fund, consider tactical asset allocation. Remember,
asset allocation is the cornerstone of investing!
Similarly, diversify your investments within a particular asset. For example, when investing in equities, do not just stick to stocks. Consider investing in a variety of the best equity mutual fund schemes in congruence with your risk profile, investment objective, and time horizon. With the benefit of a professional fund management team, an intelligent investment strategy, and a well-diversified portfolio, investing in mutual funds could be a rewarding experience. Having said that, make sure you diversify sensibly across schemes with unique investment styles in congruence with your risk profile and do not make the mistake of over-diversifying, or else the intended benefit could be watered down.
It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”- Miguel de Cervantes (a Spanish writer).
Do Not Discontinue Investing, Follow a Sensible Approach
Simply because the equity markets have turned volatile, discontinuing or stopping regular investment is not sensible. Markets, by their very nature, would remain volatile; it is how you take advantage of the volatility or selloffs that decide your investment success.
The history of the equity market shows that despite the overpowering unfavorable events such as the downturn of 2002, the US subprime mortgage crisis of 2008-09, the Dubai debt debacle of 2009-10, later the debt crisis in Greece, the slowdown in China. In 2016, and the crash at the onset of the COVID-19 pandemic in 2020, the Indian equity markets have well bounced back supported by buying activity from investors. This is because India continues to remain an attractive investment destination on the radar of many Foreign Portfolio Investors (FPI), Domestic Institutional Investors (DIIs), and High Net-worth Individuals (HNI). They are exuding confidence in the long-term prospects of the Indian economy, backed by reforms alongside the demographic advantage it offers.
Even in the face of the COVID-19 pandemic and other challenges, the corporates have exhibited an encouraging earnings trend. For a few quarters, even if earnings see a dip, do not get discouraged for the reason that earnings do not always move in a linear manner. What you need to do is take some calculated risk, devise a sensible approach, and keep investing.
In the current market conditions, consider investing in a staggered or a piecemeal manner as opposed to investing all your investible surplus in one go. Alternatively, you may choose the SIP route to invest in equity mutual funds. Following these approaches shall help you manage the downside risk better and prove to be meaningful in the long run. Keep in mind that in the journey of wealth creation, your patience, perseverance, financial discipline, and ‘time in the market’ matter the most!
Having said that, you need to timely review your investment portfolio. A “buy and forget” approach may not work, particularly with market-linked investment instruments. Say a bi-annually portfolio review would ensure that you hold the well-performing investments and take necessary actions.
Hold an Adequate Emergency Fund
“Nothing is more imminent than the impossible … what we must always foresee is unforeseen,” said Victor Hugo (a French poet, essayist, novelist, playwright, and dramatist).
Who knows what the future has in store: good, bad, or ugly? Just as in the markets, our life is not linear; There are unpleasant surprises or uncertainties that we must deal with. If you hold adequate cash levels, maybe you could handle the exigencies better. During the COVID-19 pandemic induced lockdown and restrictions (which led to job losses and pay cuts), it was cash or a contingency fund that helped several people sail through the crisis. Even going forward, with the fourth of COVID-19 and looming geopolitical tensions, holding an adequate emergency fund would come to your recourse. Remember,
Cash is King!
As regards the question of
how much cash you should hold, there is no fixed amount. You need to sensibly figure out a sum of money that will provide you with a financial safety net. But broadly, you could consider holding at least 12 to 18 months of regular monthly expenses, including the EMIs on your loans, as your contingency reserve. This money could be parked in a separate savings account, term deposit, and / or a
pure liquid fund. Avoid deploying your emergency fund in equities. When managing cash for a rainy day or contingency, the safety of your hard-earned money should be of paramount importance and not clocking higher returns.
To summarize, do not react to the volatility of the markets with undue stress. Instead, approach your investments objectively by devising a sensible approach. Keep emotions at bay in investing and avoid following the herd. Follow a prudent and scientific approach.
(The author is MD & CEO, Quantum Asset Management.)