Style-Up Your Investment Portfolio Amidst COVID-19 Crisis

  • May 17, 2020 AEST
  • Team Kalkine
Style-Up Your Investment Portfolio Amidst COVID-19 Crisis

A first of its kind, COVID-19, caused by SARS-CoV-2, has not spared any geography in the world. The impact on the global stock markets due to the pandemic has had a debilitating effect on investors. Several investors witnessed their pre-COVID-19 gains move south and into negative territory. The unprecedented situation took them by surprise and caused severe damage to their wealth.

The outbreak of coronavirus has created uncertainty amongst the investor community as the situation is such that one cannot be sure about the duration of the pandemic and the extent of the virus spread. In such a scenario, it is essential to be very calm and be hopeful that the situation would not remain the same and is set to get better with governments taking every measure possible to bring the situation under control. History tells us that there have been several crises in the past, with each of them causing severe damage to the markets, but eventually, things got better, and the markets were back on track.

Amid the COVID-19 crisis, it is difficult to predict when is the right moment to enter the market and when to exit. In such a situation, it is important to stay composed and steady. 

Now the question is how to stay firm? The answer is simple.

  • Do not panic as the situation would not remain the same.
  • Undoubtedly, investments in risky assets can provide higher returns. However, it is a double-edged sword, and in case the market is volatile, it might also result in substantial losses. Hence, in such a situation, market players must add fixed-income assets in their portfolio. The advantage of including fixed-income assets is that they help rebalance the portfolio.
  • Taking advantage of the short-term market movement in the present situation is risky.

COVID-19 crisis as an Opportunity:

  • Amid COVID-19, investors can have a look at their portfolio and accordingly include high-quality stocks.
  • After looking at the portfolio, one can have an idea about the stocks that are performing well and the ones that are non-performers. It helps the investors decide what to add to their portfolio and what to get rid of.
  • Because of the coronavirus outbreak, companies with strong fundamentals are available at a lower or discounted price.

Some Past Financial crisis: COVID-19 pandemic is not the first global crisis and is unlikely to be the last. Some of the major financial predicaments the world has seen include:

  • The Credit Crisis of 1772
  • The Great Depression of 1929–39
  • The OPEC Oil Price Shock of 1973
  • The Asian Crisis of 1997
  • The Financial Crisis of 2007–08

Let us look at some of the key areas which the market players in the past focussed on when the market conditions were not favourable:

  • In most of the cases, the proportion of equity in the portfolio is more than the other assets. It is possible that after the market correction, the equity portion in the portfolio may go beneath the fixed target. In such a case, financial advisors in the past have advised their clients to invest in stocks watching their age. Young investors have more exposure to equity in their portfolio compared to older investors.
  • While rebalancing the portfolio, there could be two situations. In the first case, there is no extra fund, and in the second case, there is adequate fund.
  • In case there are no additional funds to invest, one could shift the funds from those assets whose shares have gone up and use them in assets whose percentage has fallen.
  • In case, there is adequate fund to invest, there would be no issue in using the funds in those assets whose proportion is low.
  • Investment plan based on Goals: It is essential to see the original asset allocation while rebalancing the portfolio. If the goal is short-term, it is risky to invest money in any volatile asset. However, in case the goal is long-term, then investing in a volatile asset could provide a positive return in the long run.
  • Mutual Funds and SIPs: There are various new players in the market who have started investing in mutual funds. Mutual funds are comparatively less risky than stocks and those investors. Investors who have started investing in mutual funds generally have long-term objectives. In such a case, experts in the market always prefer to continue investing in mutual funds. For those investors, who have included multiple mutual funds in their portfolio in the present scenario has an opportunity to eliminate those funds that have underperformed and look for those funds, with a long-term performance track record.
  • Investment in Blue Chip companies: Market experts, in the present scenario, advise their clients to go for blue-chip companies as these companies are the ones which bounce back first when the market comes back on track.
  • Investors with a short-term goal are seen opting for debt instruments. Debt instrument includes government bond, corporate bond, treasury bills which are comparatively less risky than the shares of the company. Although the interest rate of a debt instrument is relatively less, still they provide a decent return to the investors.
  • People prefer gold in their portfolio because of the strong global market demand. It provides a hedge against risks related to financial markets. Diversification with gold helps in balancing inflation. But at the same time, gold ETFs include brokerage fees and investment in gold on a short-term basis could be volatile.

Do Read: Things to Learn from Past Crises: Role of Financial Planners During Times of Crisis

A recent report from S&P Global stated that the performance of gold is the same as it was during the financial crisis in 2008. During COVID-19, gold price dropped mid-March and bounced back strongly supported by the higher financial investment demand. On the other hand, silver dropped to its lower price in 11 years because of the smaller industrial demand.

 


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