The global economy has locked down and experiencing unprecedented uncertainty & volatility. Accordingly, it is ideal for everyone to ensure we are mentally and financially prepared to face what lies ahead over the next few months.
Feel like exiting equity?
Some of us could be thinking it feels like the end-of-the-world so better to cash out whatever is left. Pick up any book on the history of markets, read the experiences of veterans and invariably every crash feels the same, however, humankind has its own way of making a come back and we always do. Think about it this way, if things indeed go that bad, what purpose would this money serve anyways? However, if things get back to normal, we could witness the mother of all bull markets like the world saw in the 1920s, given the 40-60% fall in stock prices including most anti-fragile names from HDFC Group. If history is anything to go by, economy and markets will make a comeback, however, will Nifty go back to 12,000 from current levels of ~8,500 or would it first crash further and then bounce, unfortunately, nobody knows that. At this juncture, staying out of the market could be riskier than staying in the market. For the first time ever, the world’s sharpest minds are working 24*7 to fix a common ‘global’ problem while the regulations are being eased for supporting the efforts.
It’s important to remember your asset allocation and that you have not invested your entire net-worth in equities but only a portion of that capital for which you had a 5-10-15-20 years horizon, then please give it that much time. And don’t let it cause added stress at a time when the focus should be on safeguarding our family and community. Absolutely avoid watching stock prices daily, because it will affect your psyche and you could take irrational/hasty decisions.
Tempted to Invest Your Emergency Fund?
It is of utmost importance that our emergency fund (of at least 6 months household expenses) is intact and either kept in the bank account/liquid fund or hard cash (prefer to keep some of it in hard cash). Seeing falling stock prices some of us could be tempted to deploy this fund, but please DON’T make that mistake. This is for yourself and your family, don’t touch it no matter what. This was kept aside for a rainy day and that day could be near, don’t throw away your umbrella now.
It Is Time to Review Financial Institutions
The second-order effects of this unprecedented volatility and economic lockdown will be felt on credit markets and fragile financial institutions could face trouble. We must ensure the banks we deal with have sound financial condition and track record of strong risk-management during such times – preferably keep bulk of your deposits with either a PSU Bank like SBI or top private sector banks (the likes of HDFC & Kotak). Also, ensure the same for your broker, your demat holdings should NOT be lying in the pool account of the broker. Periodically you must tally the list of DP holdings with NSDL/CDSL statement. Much before the famous Karvy scam, we had shared a memo on how brokers dupe investors & best practices to follow, the memo link is shared below.
In the short-term P&L will collapse for all corporates, however, companies with robust balance sheets will emerge stronger from this chaos and see further gains in market share. The majority of our 19 portfolio businesses are debt-free and market leaders in their category. I am co-invested with Stalwart’s subscribers in the very same model portfolio and I am optimistic eventually it will all be okay.
Jatin Khemani, CFA
How brokers dupe investors?
Link to Access Our Model Portfolio