How to approach financial investment during a pandemic
From tolerating boredom to becoming more industrious, the COVID-19 pandemic has played a crucial role in imparting many lessons. It also set a Do It Yourself course on a lot of us and we also learned to be grateful for the things we already have.
Apart from life lessons, almost universally, he has taught us a few about money as well. If you are able to work and receive a regular paycheck right now, you are privileged and there is a good chance that you will be spending it effectively as well.
If we remember certain key economic events in history, prudence and originality have come to define certain generations, such as the Great Depression or the world wars. The COVID-19 pandemic will also be a defining event for the generation. This may be an appropriate time to reflect on some of the lessons we have learned in the midst of the pandemic.
Let’s look at six financial lessons we can learn from this unprecedented experience.
Have a long-term vision
Recessions and depressions are almost like nightmares for speculative and long-term investors. When markets experience volatile swings, weak companies lose their rich valuations, and most portfolios shrink sharply within months or sometimes within weeks. The COVID-19 pandemic is also driving a similar trend.
This shows how crucial it is to plan your investments for the long term. Even if you had bought in a buoyant market, the current decline should not scare you away and push you to make rash decisions.
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Double your emergency fund
Investing is one of the best ways to increase your cash flow and save for the future, but not every option gives you instant cash during unprecedented emergencies. Financial crises are neither stable nor predictable. Without proper padding, you could find yourself in unfavorable situations, such as being unable to meet both ends.
Emergency funds are essential because they can help you get back on your feet, even if your sources of income dwindle. However, there are some situations like the current coronavirus crisis, where having smaller emergency funds will not provide you with sufficient coverage. Therefore, you should plan to increase the emergency funds by half. This money should be kept close at hand, such as in savings accounts, debt funds or term deposits.
Keep track of your expenses
Most of you must have experienced a significant drop in your monthly expenses in the midst of the pandemic. The expense you are currently making is what you need for your basic survival. Now is the time to compare the value of any expenses you plan to make in the future with the present value of the expenses. The excess over the present value of your expenses will show unnecessary luxury expenses.
Sensex has seen a drop of 42 km to 27 km and then an increase of 27 km to 50 km over the past 1.5 years. Markets go up and down, but you don’t have to. When Sensex went from 42,000 to 27,000 last year, gold climbed 30%. While the importance of diversifying your investments cannot be overstated, a mix of stocks, gold and debt will provide your portfolio with stability in the face of such volatility.
Have adequate insurance coverage
Having adequate insurance coverage is as important as having an emergency cash reserve. It helps protect dependents from financial hardship while you are away. With the emergency reserve and insurance coverage in place, investors can begin to design their investment plans with confidence without thinking about unforeseen events that can negatively affect their financial situation.
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The past 15 months have made most of us realize or remember that life is uncertain. In these unprecedented and difficult situations, money shouldn’t be a significant reason to worry. One of the overlooked but very important aspects of financial planning is the appointment. It is always a good practice to make sure when creating an asset that you declare your candidate. These assets can be your bank account, mutual fund, term deposits, PPF account, Demat account, etc. Another step towards estate planning could be creating a will. It’s understandable that no one wants to talk about creating their will, but having a valid will would bring immense relief to your mind.
The views expressed in this article are the personal opinion of Akhilesh Gupta, Chief Investment Officer, Aviva India.