The “R” word is going around – How to beat it?

We are a few days onto the Unlock 1.0 & already in Mumbai where I am based there is talk of another impending lockdown.

It is a given that the virus is winning right now. There is a sense of doom and disaster waiting around the corner which will strike us anytime.

It is hard to accept that we don’t know what is going to happen as at some level we are all control freaks. We need an authority to predict with a fair degree of certainty what the future holds for us. The epidemiologists and health experts are failing to soothe us. If anything they seem to be as clueless as us.

We turn to our economists to find out about our financial health. They mouth confident predictions but the truth is a lot of outcomes depend on how our powerful politicians shape the policy which they have no way to control.

Therefore,

It is a good idea to revisit all the assumptions regarding our investments and borrow from the wisdom of investment gurus.

Covid19 may impact some of our income or our spouses. It is important to make sure we SURVIVE.

Managing risk is the only way to survive.

As the legendary investor Peter Bernstein says

“In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.”

For all of those who have a business or home loan and have fixed liabilities, it is important to draw up your cash flow statement and rework your investment strategy.

In case there is an overexposure to equity, investors hesitate to stop SIPs into equity funds. It is true that when markets correct, it is the perfect time to top up. But if your income has become uncertain and you have running liabilities it may be better to stop the Systematic investment plans or SIPS. You have to look at the revenue/ income picture and navigate your finances. The time to be a passive investor is gone.

Asset allocation is the key to your financial immunity. Typically here in India, the average joe has investments in equity, debt, real estate & gold.

Equity has been volatile and can be for some time to come. As of now it does seem divorced from the real economy but that is how the market is. When and how it will converge is anybody’s guess.

To know why the equity market is going up click here.

I hear anchors asking experts or promoters for forecasts which is hilarious. There are so many moving parts. Will the virus come back with more viciousness? Will there be further lockdowns? Will the supply chain be restored? If the migrants return, will the factories work with 100% capacity?

If the government decides to push through structural reforms it may again completely change the business landscape.

A dispassionate look at your portfolio and your cash flow will make it crystal clear to you what need to do.

If you need stability, add a little fixed income. Invest in Bank fixed deposits, good quality Corporate fixed deposits, Government Saving schemes, or Nonconvertible Debenture and Bonds. Debt Mutual funds can also be looked at if an expert is guiding you.

They will give you a poor yield as interest rates in the system have reset lower. But inflation is also lower so your purchasing power may not be too compromised. There is a time when you have to just protect your principal. This may be it.

Gold has been the star of the portfolio as it has been the best performing asset class this year. Will it continue its outperformance? Depends on how other assets behave. It is a good hold.

Real estate anyway is illiquid. If you hold it you cannot do much about it. And if you wish to buy more at a time like this then you are super-wealthy. Wealth maximization should be your only goal.

Asset allocation and diversification are the antidotes to uncertainty.

Again to quote Bernstein,

‘I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. I want to make sure I’m exposed to it. Somebody once said that if you’re comfortable with everything you own, you’re not diversified.’ ‘Diversification is an explicit recognition of ignorance.’

The Pandemic has brought in the possibility of a recession. Which is the unspoken “R” word.

I think you can beat the recession with diversifying portfolio in investments which are not correlated. It seems a simple enough strategy, but a disciplined implementation is a key to navigating these unpredictable times.