Covid-19 has affected countries, global markets and individuals on varying levels. Many measures have been taken by regulators and governments in response to this crisis to ensure that their respective economies survive. With the weight of sustaining livelihood becoming more critical as compared to reducing the pace of COVID-19 spread, governments across the globe are now heading towards gradual unlocking of the economies.
Unprecedented situations like these can lead to hasty decision making, some of which might yield sub-optimal results, and hence investors should try to avoid the following mistakes:
1. Inadequate rainy day Fund
The importance of having an emergency fund is critical during the current pandemic situation with a lot of uncertainties relating to businesses and job continuity. It is advisable to keep at least 3 to 6 months of your expenses as an emergency fund and putting those funds in highly liquid instruments such as liquid funds or fixed deposits. Having all your savings into financial instruments which have lock-in periods would be unwise going forward.
2. Not managing your Expenditure
It would be prudent to postpone large expenditures that are discretionary in nature till such time that things become normal, in order to maintain adequate liquidity and savings. Avoid spending money on big ticket items during online sales from e-commerce companies until it is of utmost necessity.
3. Stopping your SIPs/Investments
After witnessing a bear market in equities, investors usually get cold feet in deploying new money to beaten down strategies. Instead of timing the markets one should continue their investments based on existing financial plan.
4. Taking fresh Debt
It is advisable to not take new loans during a pandemic situation, as there is very less income security with possible salary cuts, job losses on account business slowdown. Any default in the repayment of loans could negatively impact your credit score and future borrowing ability. On the contrary, you should try to repay your liabilities starting with higher interest loans such as credit card debts to reduce your financial burden.
5. Not reassessing your Financial Plan
Periods like these give opportunity to reassess risk tolerance appetite and rebalance the portfolio to the desired levels. Risk assessments done during sunny days have chances of being wrong mainly due to overestimating the risk appetite.
In summary, it would be prudent to draw up your own Investment Charter, which is a vision document that lays down the philosophy, framework and process of managing your portfolio, while also aiming to understand broadly, the purpose of investment, horizon, liquidity and risk appetite.