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Financial lessons from the pandemic: Part 1

What COVID-appropriate behaviour teaches us about managing our investments

Financial lessons from the pandemic: Part 1

The spread of the second wave of COVID-19 has broken all records. Several states have resorted to lockdowns, long-distance travel has been suspended and enforcement agencies have doubled down on maintaining social distancing and masking. On the other hand, economic recovery has come to a grinding halt, with the restrictions being imposed on the free movement of people as well as goods. Amid all, a cloud of uncertainty hovers over the markets and investors.

Benjamin Franklin once said, "Out of adversity comes opportunity." So, we need to learn the lessons that every setback teaches us. Here is the first of our two-part article wherein we cover 10 important lessons investors need to learn from this ongoing pandemic.

1. Follow multi-layered masking for safety

Financial lessons from the pandemic: Part 1

Towards the end of 2020, WHO advised people to use multi-layered masks or masks with more than one type of fabric for better safety. Similarly, in the field of investment, diversification can ensure that our investments are protected from any external 'infections'. Instead of relying on a narrower investment mandate, we need to make sure that our investments have enough capacity to absorb the shocks emanating from one single instrument/asset class in the portfolio.

2. Avoid the crowds
Although diversification is important, overdoing it is of no use after a point and can also become counterproductive. In order to achieve sufficient diversification, it is enough to invest in four-five funds, as any number beyond that only increases your work of managing them.

3. Maintain social distancing - a need, not an option
Social distancing is an effective tool in containing the spread of the pandemic. Similarly, to ensure the effectiveness of your equity investments, you should have enough 'distance', i.e., time horizon. Consider investing in equity only when your goals are at least five to seven years away so that you can give your investments ample time to grow. In the short term, equity returns tend to be volatile. But in the long run, this volatility smooths out and returns become stable, thereby paving the way for investors to achieve their long-term goals.

4. Stay indoors as much as possible

Financial lessons from the pandemic: Part 1

During the lockdown, most of us were forced to stay at home to reduce the spread of the virus. Similarly, while investing in equity, if you do not stay invested in the markets, then it would ultimately affect your financial well-being.

Timing the market and overactivity are harmful to your returns and it is always better to stay invested for the long term. One should note that returns from equity come in spurts and don't accumulate like returns from debt. You can have long periods of downturn or stagnation but then, the market rebounds all of a sudden. If you are sitting out of the market during such periods, your overall returns will suffer.

5. Be indoors but stay healthy

Financial lessons from the pandemic: Part 1

Staying indoors has been the directive of most health organisations around the world during the pandemic. But they have also realised that its side effects have resulted in reduced immunity for many. Similarly, debt and gold are traditionally considered as safe havens, but in the year gone by, we saw that even they had not been immune to the market trends and mishaps. The portfolios with only debt or gold could actually harm one's return earning potential over the long term.

Just as vitamin supplements and minerals boost your immunity, allocation to international equity, mid and small caps, along with some minimal allocation to gold as a hedge, will also boost your overall financial immunity. However, don't go overboard on them. Strike the right balance of the asset classes to immunise your portfolio.