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Stick to the basics

The basic principles of savings and investment are not under lockdown. In fact, this is exactly the kind of situation where they would be most useful

Stick to the basics

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The stock market is not the economy. This is something that you should not forget even in normal times. The day to day movements of the stock markets reflect the collective opinion of traders on what will happen the next day, week or month. In times of great uncertainty, this period shrinks to hours or at most next morning. All that traders are trying to do right now is to somehow stay afloat till the next session.

It would be a grave mistake to imagine that when the Sensex or the Nifty fall by 30 or 40 per cent, that this number is a fair (or even sane) judgement of where the economy will be in two or three years. One circuit down, two, three it does not matter. These are just numbers driven by people who are focused on what will happen tomorrow morning, and who are just guessing about what will actually happen. And the wild, manic-depressive swings that stock markets are putting up shows that these are indeed nothing more than guesses.

Savers who have money in equity-backed savings are panicking because it looks like that the huge drops in the markets are reflective of something that's really going to happen to the economy in the future. That's not true. I'm not saying that the situation will not be dire for a time to come, but there's no way of predicting.

The cause is clear - this is not a financial or an economic event. It is an externality. It is like a natural disaster except that it's worldwide and simultaneous. This makes it impossible to understand or deal with in financial terms. Think of the 2007-08 global financial crisis. At that time, governments around the world latched on to the idea of pouring money into economies. Get businesses and people to start spending and we're done. There were a lot of undesirable side effects but this 'helicopter money' approach did get things moving.

Somehow, a lot of people are repeating the same mantras now, which is quite puzzling. This is a natural disaster and the way to get things moving is to tackle the medical aspect first and then get money and food to people at the bottom of the pyramid. The disaster is not economy-first and the solution is also not economy-first.

At this point, it's tempting to say that later, many things will change. It's entirely possible that many industries and businesses movement towards change will be accelerated. Things that could have been digital but were physical because of inertia will disappear fast. That's an obvious conclusion. However, from that kind of a motherhood statement all the way to an actual business impact will be a long time coming. Don't start looking for it right now, as a saver and an investor, you'll just make mistakes.

This sounds like the most boring and banal thing in the world, but this is just the time to stick to the basics. The 'stick to the basics' advice is made exactly for extreme times, whether on the upside or the downside. Do not get carried away by the apparent enormity of the events. Choosing quality investments, being conservative, having an asset allocation and sticking to it while the debt-equity balance changes, ensuring that only long-term money stays in equities. These are the same formulae that work every time and no matter how unlikely it looks right now, these are the ones that will keep working regardless of the source or the depth of the panic today.

Decision-making under risk and uncertainty lies at the heart of equity investing. We don't know what's going to happen, but that does not mean that we don't know what to do. That may sound strange at first but actually that's true of all equity investing, whether in good times or bad, in normal times or perilous ones. Because of the nature of this event, it's easy to lose sight of that, but that would be a great peril by itself.