Personal Finance

Practical Tips In The Coronavirus Meltdown

This downturn is unlike any other. For once, economies cannot self-adjust because a virus is wreaking havoc

The virus-ridden start of 2020 has meant we have seen two worldwide economic meltdowns in our lifetime.

With the subprime crisis of 2007-08 and the pandemonium that followed still fresh on our minds, we have hurtled towards a pandemic-triggered recession this time.

Job losses, leaves without pay, missed business growth will characterise the financial crisis at the individual level as we plod through this time.

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How is this bear market different from the past?

A fast fall: The speed at which the Indian markets are falling is unprecedented. Just three months back our indices were trading at their all-time highs (12,160), and it took the Covid-19 pandemic just three months to raze off around 35 percent off of them.

According to a Morgan Stanley report, the pace of the current market fall is about three times faster than the bear market of 2007-08, induced by the US housing credit crunch.

The swift fall in the wake of the spread of the novel coronavirus is due to lockdowns in large cities and districts in many countries and the resulting panic among investors.

Unanticipated in earnings estimates: Since this virus became a pandemic in a matter of weeks, the earnings estimate of companies are yet to be adjusted to incorporate the economic repercussions of the virus.

There is no cushion then to absorb the shock awaiting productivity in the fourth quarter of FY-20, with most of the country under a curfew.

Businesses will be severely affected and those unprepared may get wiped out. The brunt will be felt in the final quarterly results and drag down the annual performance of companies, affecting markets even further.

This shows the severity of the current situation and the panic among investors, there is a flight to safety in the current scenario.

A front-loaded recession

Observers say the global recession is front-loaded, ie. the underlying drivers of the economy were strong before the world got sick. While major countries in Asia such as China and India were facing recessionary pressures, European economies and the US were faring well on their macro-indicators such as unemployment rates (low).

Many leading brokerage firms expect the stock market to recover quickly in the second half of the year when the new infection rate slows as lockdown and social distancing measures become effective.

Once the rate of infection is contained, economic activity will start recovering, aided by the fiscal stimulus provided by countries to battle the economic repercussions of the virus.

Tactical reallocation for investors

Tactical asset allocation is a process that aims to shift the portfolio asset allocation tactically to earn additional value depending on changes in markets.

Hence, when the markets are bottoming out, dragging strong-fundamentals companies down with them, tactical changes (to address such specific challenges) could help us. This is the time when relatively more expensive stocks, especially those with strong fundamental business strength, get a little affordable as the unwavering negative sentiments hit them too.

We could aim to include more such equity stocks such as blue-chip or large cap stocks in our portfolio on the secondary market. They would be valuable additions and fare better than the rest in the long run.

What should be done with our SIPs?

Yet, in times like this, we also face a liquidity crunch in our personal finances, making us question if we should suspend our systematic investments or not.

Reminding ourselves of why Sips are done in the first place could put things in focus. They are done for three reasons:-

Achieving a financial goal
Disciplined investments
Rupee cost averaging

Source: Tavaga

Different financial goals require different asset allocations. For example, a short-term goal of going on vacation versus a long-term goal of university fees.

Sips also inculcate the habit of investing, and not just when we come into extra money (which does not happen with most of us) or when someone nudges us to invest.

Sips also keep us from growing cold feet in a bear market (just like this one) and stopping our investments.

Markets turn volatile when seasoned traders try to time the market, i.e buy when the market is down and sell at the peak. As retail investors, we can never be sure whether prices will fall further or start rising soon. The only way to handle such uncertainty is to average out our purchase-cost of investment products over a period of time.

Rather than stop our Sips, if our income let’s us, we should continue with them. But this is a good time to review the underlying assets in our portfolio, including that of our Sips’. We could resort to tactical changes to make them more efficient, preferably with the help of a Sebi-registered investment adviser.

A methodical investment portfolio

Volatile markets are all the more reason for us to stick to our plans unless they were wildly off-track from reaching our money goals. It could be a wake-up call for those of us whose investment portfolio was made up of haphazard instruments, added sporadically and without much planning.

If it was a result of a wayward suggestion here, some trend there, then this would be a good time for deep cleansing. And, with prices still headed south, a prudent time to pick up investments that work for us. Asset allocation would have to be the basis for a smart portfolio and it is far simpler than rocket science. We could turn to a registered investment adviser for focussed guidance.

Practical tips for personal finance in the coronavirus crisis

We should:-

Cut out discretionary spending
If you had created an emergency fund now is the time to use it, do not liquidate your long term investments, touching your retirement portfolio is the last thing you should do.
Use our emergency fund, rather than dip into our long-term investments or our retirement savings
Be frugal with our food shopping and not hoard (with zero-waste use of most food items, by using up everything from seeds, flesh to the skin of vegetables; deep-fry less to conserve oil; preserve ingredients by deep-freezing, etc.) This saves us money and trips to a store
Do cashless transactions, avoiding the exchange of physical cash which may be needed in emergencies and also to avoid germ-transfer
Move our short-term savings to financial assets which are more liquid
Learn new skills to create an additional income source. It will help us face the challenges that await us once the lockdowns are lifted
Avail of free art and entertainment options available on the Internet to keep up our spirits

We should not:-