Corona virus meltdown and investments

Photo by Anastasiia Chepinska on Unsplash

Time to increase the equity exposure

Corona virus is a real threat which is disturbing the world and impacting the global economy enormously. Such an extreme situation has never been witnessed ever in our lives where we see many cities /countries, including ours in a virtual lock-down. Countries are in virtual isolation and business has come to a stand-still.

Although the social and economic situation may sound extreme, the world has witnessed several crises in the past viz. epidemics, pandemics, global financial crisis and many more. The one common thing witnessed in such crisis is the knee jerk reaction of the markets and plummeting the markets to bottoms as if there is no tomorrow. While these crises are real and it impacts the world economy and does damage to several people, but the stock market falls are unreal and far beyond such damages.

When and how this crisis will get over is difficult to predict and can only be said in hindsight. However such crises historically haven't lasted long as the developed world is competent enough to come out with solutions to address such crisis. It is difficult to predict the magnitude and impact of such a crisis including the recent corona virus, but we hope it will soon be over.

Past epidemics

When to correlate the historical epidemic crisis to the equity markets, we also have some common observations. We have witnessed that such epidemic crises have lasted for a few months and the equity markets have bounced back after that.

The above table is the testimony of the bouncing back of equity markets after sharp declines or major crises. We reason is that the equity markets corrected very sharply during the outbreak due to panic and herd mentality in the markets.

The fall was broad-based across the markets and there was a steep correction in prices everywhere. This could not be justified on any long term fundamentals factors like expected growth of rate of the economy, business environment, industry outlook, management quality, etc.

In the present crisis, we have seen about 25–30% of correction in the Nifty 50 alone till date from the peak levels.

What can investors do?

As an investor, it would be only natural to be worried. However, there are a few things we should keep in mind…

(1) Do not panic

(2) Stop looking at your portfolio every day

(3) Do not sell and book losses / low prices in equities, unless you urgently need money

(4) Re-look at your asset allocation

The importance of the asset allocation strategy is very well known among seasoned /wise investors.

There have been many studies that show us that the asset allocation of an investor is the most important factor and the primary determinant of the long-term performance /returns of the portfolio. A famous and often quoted study done in 1991 has put the contribution of asset allocation to the extent of 91.5% of the total portfolio returns. The rest of the contribution was from market timing, stock selection and others.

However, most of us tend to never look at the overall asset allocation of our entire portfolio across all asset classes like bank deposits, PPF, government savings schemes, traditional insurance policies, gold, property, equities and so on. Indians save only about 5% in equities, which is the only asset class which delivers long term real returns above inflation rate to generate wealth.

Times like these are rare opportunities to relook at your overall asset allocation and invest in equities. You can consult your financial advisor to understand your risk appetite and decide upon asset allocation. A higher level of equity allocation is recommended when the market is available at attractive valuations and often preceded by crisis or a pessimistic economic outlook like currently in India which is primarily because of the corona virus coupled with banking and financial crisis.

We are in times of uncertainty

We must also understand that predicting equity markets is inviting failure. No one can do that and say for sure for how long the markets will stay at low levels and regain the previous peak. Practicing asset allocation is the only proven key to Success; predicting markets and timing markets is NOT.

We would also like to say that we are not experts on the present situation and the damage which can happen. What has been written in this article is clearly based on the historical and statistical evidence that every crisis eventually ends and the markets will survive, revive and eventually rise. As far as the present situation is concerned, we can say that the markets have overreacted to the situation which is still evolving.

Conclusion

Many investors may be sceptical and scared. However, we would like them to feel relaxed and comfortable. This is neither the first time or the last time the markets have seen panic which is only temporary. Please do not panic and take any wrong decision. Understand that the current loss in equities are only ‘notional’ but by taking a wrong decision (sell/redemption) one will be making the loss ‘real’. Please avoid that. It is also a great time for new investors to enter the markets and have this as a very good starting experience.

We would request you all to be extra careful and stay safe. Do practice basic hygiene strictly and maintain social distance and avoid travelling and meeting people. Corona virus presents a huge challenge to each one of us. We can overcome this challenge as one nation, one community, one society, one family and one person at a time.

Get in touch for guidance on personal finance

or email us your query at rege22866@gmail.com

Follow us on Instagram for pocket updates.

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Investment Advisor . OTA certified©️ . Let’s talk about money and it’s growth. Let’s talk about investment.

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Mahesh Rege

Mahesh Rege

Investment Advisor . OTA certified©️ . Let’s talk about money and it’s growth. Let’s talk about investment.

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