November 06, 2020
The Covid-19 pandemic that took the world by storm at the start of 2020, has left a lasting mark on our lives. The pandemic’s impact on our investments has been even more pronounced. With the stock markets going into a free fall in March 2020 leaving investors shaking in fear, followed by a rebound like never seen before, and subsequently, high volatility, is more than some investors could bear.
While this phase has been nerve-racking, it has also taught us some important lessons on investing and building a robust portfolio. Here are 5 lessons that the pandemic and its aftermath has provided:
It’s important to maintain liquidity to meet your sustenance expenses during challenging times. Liquidity needn’t be maintained in cash; it could be investments in highly liquid investments such as liquid funds offered by mutual funds. Such funds invest in government treasuries, money market, etc. and offer redemptions within a day or two. Keep sufficient cash for at least a year’s worth of sustenance expenses. This will help you avoid distress selling of your quality stocks and depriving you of future gains.
A well-diversified investment portfolio (across sectors and stocks) helps ride out market volatility. Work with your investment advisor to build a portfolio that is made up of quality stocks in sectors that are on the growth path.
The steep drop in the stock markets in March 2020 revealed a large number of investors who had taken on more risk than they could stomach. Discuss with your investment advisor how much risk you are willing and able to bear. Based on this assessment, your advisor can build a portfolio which could be a combination of stable fundamentally strong stocks that form the long term component of your investments, and a ‘momentum’ group of stocks which offer relatively short-term returns, but could carry a higher risk. The composition between the long-term stocks and momentum stocks would be based on your risk appetite.
Stock market dips are part and parcel of investing. In fact, these provide attractive opportunities to invest in multi-bagger stocks at low valuations and thereby reap high returns. Here, your investment advisor plays an important role in not only making recommendations of stocks with good return potential, but also in monitoring your investments so that you exit early in case of any potential fall in valuations. Your advisor is your ‘best friend’ in building your investment portfolio and closely monitoring it. Seek a SEBI-registered advisor with extensive research capabilities and a solid track record of offering quality stocks at attractive valuations.
Take the right step today to plan for a better tomorrow! Happy Investing!