VR Logo

No strategy needed

If you need to change your savings strategy in response to crises like Covid-19, then you are doing it wrong anyway

No strategy needed

As the virus scare roils the world, investors are watching the value of their investments go up and down by huge amounts almost every day. While the general trend of equity values has been downwards, the repeated and severe changes of directions clearly demonstrate that no one is clear about the eventual impact on the global economies, far less on specific businesses sectors and businesses. Curiously, in the early phases of the virus crisis, some of the usual suspects had confidently predicted the exact percentage points by which China's and the world economy would be impacted. Those days are now long gone and now everyone is clear that the situation is unpredictable.

So that should be a disaster for investors, right? As it turns out, not quite. While it's true that the impact of the virus crisis cannot yet be estimated, that's no different from any of the previous large crises that the global economy and world business has seen. In general terms, in 2001 and then again in 2008, an unpredicted crisis hit the world economy which then turned out to have a great impact on investor wealth. Both times, even well after the crises had hit, it was not possible to predict the duration or the magnitude of the impact.

Of course, the human cost (and the primal fear) of a deadly disease is psychologically very different from a purely economic crisis. However, anyone who has savings and investments has to keep all that aside and think about the investment impact and its mitigation. Eventually, the risk will get contained, but the future financial needs of you and your family will stay.

So what should your response as a saver and investor be as far as reacting to the virus crisis goes? The answer is simple, if a little blunt and unexpected: if you are having to respond to the crisis with changes to your savings strategy, then you were doing it wrong anyway. Specifics aside, a financial crisis is always due in this world. We have to have an approach to savings that is always tuned to get the best (or least worst) out of any situation. This is not something new that I'm writing. The future is always unpredictable and therefore we always have to have a savings strategy that takes this into account. This is why I'm always sceptical of the idea of reacting to news and events with changes in one's saving strategy.

Here's what I wrote when someone asked me for some strategy for some year or the other:

Investors should map their future financial needs along a time-scale. This is not difficult as major expenses tend to be predictable. All money that is likely to be needed for three to four years or so should be kept in fixed income investments. These could be government small-savings schemes or debt mutual funds. All investments intended for a longer period should be invested in a small (four or five, at most) number of diversified equity funds and balanced funds. These investments should obviously be made not in fits and starts but gradually, using an SIP. This strategy is simple and effective. Apart from these investments, you should be prepared for emergencies. All earning members of a family should have a term insurance equivalent to around 10 years' income. If you buy a pure term insurance, this is easily affordable. You should also have health insurance, as well as about six to nine months' worth of expenses in your savings account as emergency money.

Really, that is all there is to a news-proof personal investment strategy. The important thing is that the ideas behind this are easy to understand. There's no mystery as to why this is how everyone should save, regardless of whether the news is good or bad, or whether it's just noise or actually impactful.