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How To Invest To Manage Sudden Financial Stress In The Future?

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How To Invest To Manage Sudden Financial Stress In The Future?
Harsh Jain - 23 May 2020

The economic impact of the current pandemic has compelled many investors to take a re-look at their portfolio and take an educated approach ahead. This calls for taking a few steps to safeguard your portfolio against unprecedented market storms such as this to navigate with ease . Let’s take a look at some ways to invest today so that you can comfortably manage such sudden financial stress in the future.

Diversify

Diversification is about investing in securities that are not correlated to one another. In other words, if one security loses value, then it has no impact on the value of the other securities in the portfolio. While this is ideal since an economy in recession will impact all investment avenues, investors can ensure that it is minimal.

Usually, most investors start with one investment and slowly build their portfolios with time. Eventually, they create an investment plan based on their financial goals and start diversifying to minimize risks. However, not all investors are the same and some tend to incline towards high-risk investments while others prefer their low-risk counterparts. As a result, the portfolio starts becoming skewed towards one side. While in regular market conditions, there are enough opportunities to recover from a losing position, during a crisis, if you are stuck on the wrong side of the line, recovery can take a while. Hence, it is important to ensure that your investment portfolio is diversified so that you walk that thin line between high and low risks.

Tiered diversification

Diversification should also be tiered. This means that investors must look at different asset classes and diversify within each asset class too. For example, they can look at the equity asset class and diversify across sectors, market capitalizations, geographies, etc. Also, they can look at the debt asset class and invest in FDs, bonds, liquid funds, etc. The idea is to expose the investments to a diverse range of securities. If done right, this can be a great strategy during regular times as well as a crisis.

Stocks, Mutual Funds, Commodities, Gold, etc.

Investors have numerous options today. They can create a portfolio that offers exposure to various market segments like equities, debt, gold, commodities. A financial crisis can come in any form. Hence, it is impossible to predict which segment might get affected. With multiple asset classes in the portfolio, the portfolio can weather a storm better with lower risks.

SIPs are probably the ninth wonder of the world

If compound interest is the eighth wonder of the world, then SIPs are undeniably the ninth. Imagine an investor having a SIP in a multi-cap mutual fund. When the markets crashed, he would have received more units for the same amount. Eventually, as the markets will recover, he will have more units at his disposal, and depending on the speed of recovery, his returns could be huge.

Risks are real

Before this pandemic, many investors took extra risks since markets would usually offer an opportunity to redeem without suffering heavy losses. However, today, we understand that those opportunities might take some time before they come. Hence, while assessing your risk appetite, it is important to remember that risks are real and not notional. Assess your risk tolerance carefully before investing.

Finally, remember that while the pandemic might be unprecedented, financial stress is a part of life. While you might be feeling overwhelmed with this situation, take this time to plan investments for the future. Create a strategy that helps you achieve your financial goals while keeping the risks within the manageable limits.

The author is Co-founder and COO at Groww

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