Lessons for Equity Market under Crisis

‘Economic tsunami’ wrought by COVID-19 has resulted in the halt of global economies, break in the vicious cycle, downturn of financial markets, plummet in business operations and restriction on social gatherings. The panic intensifies while seeing at the unemployment rate and the disaster happening to the human lives.

After the 2008 crisis wreaked by the crash of stock market, the market is again brutality impacted by COVID-19 pandemic. Stock markets worldwide have slumped during the year 2020, thereby affecting new and existing investors.

Albeit, tough times bring along some of the great learnings for the investors on managing their money. The global financial crisis induces the importance of financial preparedness for investors. The occurrence of COVID-19 and crash in the financial market as its result has generated the importance to learn certain lessons.

Also Read: 5 Tips to save money amidst lockdown

Let us look at few of the lessons

Stay invested, re-align portfolio:

Equity investments are all about the gradual building of the wealth over time, rather than generating quick returns.

The key is to remain invested and not to panic while keeping a detail eye at the current situations. At such a time, there is a need to bear the pain of market downturn patiently.

Witnessing the degree of crisis, for some the portfolio may even get eroded but selling of the stocks at a lower price is not a prudent approach. In-case, there is not an immediate requirement of the money, it is advisable to remain invested.

It is believed that as the market regains its momentum, the individuals’ portfolio will also start reviving to help recover the value of investment.

Take advantage of market timing:

Warren Buffet has stated, “Be greedy when others are fearful, and fearful when others are greedy.” As a human tendency to follow the market sentiments, most people tend to sell their stocks when uncertainties start hovering in the market. Any disruptive new leads to a situation of panic in the market due to the fear of crash.

Currently stocks are trading at their low price, amid the situation generated because of COVID-19. In the prevailing bear market, the investors can gain by keeping the fear away and making the best use of the prevailing situation. As the companies are trading at a price lower than their intrinsic value, this creates an opportunity for the investors to buy the stocks at a discounted rate.

Thus, buying at a low price and selling at a high price can be a lesson learnt from past situations of crisis.

Always have in place an adequate emergency fund

With the occurrence of coronavirus, shutdown of economies had imposed a complete lockdown situation. The investors having all, or majority of their money invested in the equity market got severely affected by this sudden halt. Thus, it is important to have liquidity to meet certain contingency provisions for the unprecedented time such as ongoing attack by COVID-19, subprime crisis of 2008 and dotcom bust of 1999.

The absence of emergency funds might lead to either of the two possibilities- first, borrowing at a high cost and second, the investor goes for distress selling of his investments. Thereby, the prudent approach is to park a certain amount which can cater to expenses of a minimum of 6 months on a regular basis.

As the economy is at halt, which arises the chances to lose the job. Having no regular income can be dealt with an emergency fund in place.

Diversification by asset class:

Diversification involves the investments in more than one stock or in various kind of financial instruments which can be from different sectors. It is a means to minimize the risk for the investors as investing in a diversified portfolio reduces the chance of huge losses at a cumulative level. As the impact of economic downturn differs for different sectors, thus, investing in multiple sector companies is one of the best to quantify the risk from the loss.

The magnitude of loss from one stock can be submerged by the magnitude of gain from another stock. It works in a way that if there is a fall in one of the stocks, that loss could be negated (partially or fully) by the profit earned on another stock (subject to that the gain per cent being higher than the loss per cent).

Harry Markowitz, the economist, and Nobel laureate, stated that Diversification is “the only free lunch in finance.”

Also, coming from a great investor Warren Buffett, diversification secures the investors’ money to an extent. Albeit one cannot assure the market trend, however, considering more than one security at least distribute the risk.

Borrowing is not a good idea

Investing in the equity market after borrowing is not a good idea. Money should be borrowed only when it is required at the most and knowing the back up to repay the same. Repayment becomes an issue and may further drain the investments in difficult times when the market is not supportive.