Key investment lessons learnt from Covid-19

2020 has certainly been a year of reckoning! We are probably in the midst of one the worst health challenges in the last century and if history is any proof, we hope that we will emerge stronger and better.

The crisis has not left any aspect of our lives untouched including the financial markets. The severe market shock of 2020 has confounded the retail investor who is still looking for answers on what went wrong and what can be done going forward.

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While we believe that things are going to get better soon, it is time to reflect at the last few months of this pandemic and understand the key lessons we have learned with respect to investments and portfolio strategies.

Investors need to be comfortable with volatility

Seasoned investors know this! Markets are subject to multiple cycles of volatility. The current volatile market environment (as a result of the pandemic) needs to be viewed by investors as a time to reflect upon their existing portfolios and understand their investments. New investors need to understand that instead of getting dismayed by the current situation, they need to embrace volatility since getting scared by volatility will also keep you from participating in the growth potential of equities.

The famous investment quote asserted that “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.” What he essentially meant was that investors need to understand that the markets will fall from time to time and that you should only allocate in them for the long term and allocate that part of your portfolio where you are comfortable taking volatility.

You can’t time the market

While investing, we like to wish for a magical sense of intuition that would predict the market and safeguard all our investments. Now, wouldn’t that be something!

As an investor, trying to figure out the bottom of the top can be a futile task, and instead, investors need to focus on time spent in the market. We do know that, eventually, markets tend to recover. We have survived the global crisis in the past and will continue to do, even this time around. So the more time you spend in the market, the better your chances will be.

Diversification will be your best hedge

A well-diversified portfolio is your best defense against a volatile market. Nobody keeps all the jewels at one place, similar is the case with investments.

It is necessary to keep in mind that one doesn’t invest all the savings in one particular fund. Diversity is the key to successful returns which also ensures one has a proper mix of large-caps, mid-caps and small-caps. it also maintains a balance in your portfolio amidst growth-oriented assets (such as equity) and stable assets (such as debt).

Survival of those who adapt best

Covid-19 has certainly highlighted the vulnerability of even the strongest blue chips. However, it has also shown how adaptable stocks have bounced back. Investors who continue to adapt, will emerge relatively unscathed.

Knee jerk reaction to short term trends can be devious as it can lead the investors to panic selling or buying.

Investors should instead assess the on-going movements in the market with a cool head and take decisions based on their financial goal.

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Discipline. And some more discipline

The hardest part of losing money in the market is staying invested through the worst of it. Much like the restrictions imposed for our own safety, the pandemic has taught us the importance of mitigating risk as much as possible before taking the plunge.

Investors need to understand that ups and downs are part of the investing cycle and that the long term performance delivered by the markets is available to investors who remain in the markets for that long term window.

Regular investing through SIP strategies work best in terms of discipline and this is the time to maintain these and not overreact to the near term correction. Remember corrections are
opportunities to invest in the markets at lower prices.

Ultimately, investors need to be more responsible for their investments and ensure regular portfolio checks to ensure their financial goals are being met.

(The writer is Chief Business Officer, Axis AMC)