Inculcating a habit of saving, investing, and planning money matters and fiscal responsibility has always been important, but 2020 has made us realise this like never before. Juzer Gabajiwala, director, Ventura Securities, shares some financial discipline lessons to adopt from the COVID-19 pandemic that can mitigate the impact of economic uncertainty.
Lesson 1: Asset allocation is important
The saying goes, “Don’t put all your eggs in one basket,” and this applies to investments too. It suggests you should not put all your investments in one particular asset. No one could envisage that pharma funds, which were facing a slack period since 2015, would generate over 50% returns because of the pandemic. So, it is important to diversify, using asset allocation, and keeping in mind the risk profile of the investor.
Ideally, asset allocation should be done as per the financial goals of the investor rather than the historical performance of the asset. As a thumb rule, 80 minus your age should be the percent of your assets invested in equity and the balance in debt. So, if you are 35 years old, 80 – 35 = 45; 56% should be equity (45/80) and 44% should be debt.
Lesson 2: Emergency Fund is a necessity
One thing that this crisis highlighted is the need to maintain a piggy bank, i.e., a savings fund allocated specifically for emergencies. What we faced during the 2008 crisis was a liquidity problem, but in this pandemic, the entire economy had come to a standstill. Building up your emergency corpus not only helps one to take care of necessities during unforeseen times but also protects one’s investments from distress sale. Thus, it will always be prudent to maintain three to six months’ expenses as a kitty that is available at all times.
Lesson 3: Never say never again, because gold is also an asset
Let us see the performance of gold whenever the equity market is jolted with a crisis.
The above table illustrates that gold has outperformed whenever equity returns were dented badly by any crisis. One should not look at gold just for ornamental purposes, since it can also act as a hedge for equity investments. Both these asset classes have a low co-relation with each other and this low co-relation helps gold to become a perfect hedge for equity investments. Have some allocation, of 5-10%, for this asset class as well.
Lesson 4: A pandemic can cause economic havoc
Humans have faced several epidemics, diseases, and pandemics that have spread through air and water, but there was never a time when the entire world came to a standstill. We could have never imagined that not just a country but nearly the entire world could be completely locked-down. Today, this pandemic has not only created a medical situation, but triggered economic havoc too. Governments are still in a dilemma regarding how to tackle the disease and how to revive economic activities. This, therefore, necessitates the need to ensure that every individual has adequate medical health cover and maintains a healthy lifestyle.
Lesson 5: Create a second income source
Creating a passive or second source of income has become a critically important aspiration for every individual. In the month of May, the unemployment rate was 24.48%, which shows that the bread-winners can be jobless at any point of time. Today, people are making money just by uploading videos on YouTube; some by blogging or being influencers. You can use your passion or develop a new skill, which will help you generate a second income for you and your family. One of the best ways to create a second income is to make your money work for you by investing wisely and early. This can be done by investing continuously in various investments like equities, mutual funds, gold, real estate, etc.
With the exception of the graph, all images via Getty Images