Investors should invest in a particular asset class only if they have 'the ability to bear volatility'
We all know how the economy is severely bruised under the terror of the historic pandemic. The storm is yet to pass, and we are still struggling to adapt to the ‘new change’. Today, let us review our financial journey of 2020 and learn from the mistakes.
● Risk is different from volatility – Volatility is something that can be measured by using formulae like Standard Deviation, but the risk on the other hand is a subjective, personal matter for which there are no formulae. The volatility of a particular asset is the same for every investor, but every investor will have a different assessment of the risk for that same asset. The market fell like ninepins in the month of March 2020, but today, in a span of fewer than 10 months, it has touched all-time highs. Such volatility can only be faced by investors who have the required risk-taking ability, both financially and emotionally. So, investors should invest in a particular asset class only if they have 'The Ability to bear Volatility' associated with that asset class.
● F&O – Weapons of mass destruction - As Warren Buffet once observed, Futures and Options are financial weapons of mass destruction. These financial instruments were introduced with the purpose of hedging equity investments. But many investors have started using them to bet on their short-term views, as they could deliver high returns in a very short span of time. These financial instruments played a pivotal role in the 2008 financial crisis. So, it is better for lay investors to stay away from these financial weapons.
● Reduce financial leverage – Never take loans that will make you walk on the brink. EMIs of your financial leverage like housing loans, education loans, or car loans should not be more than 10-20 per cent of your income. It should be kept at a bare minimum, as far as possible. It is important to evaluate your repayment capacity carefully before signing up for any financing facility, as an unaffordable loan could not just destroy your finances but may also lead to a loss of a precious asset and cause immense psychological stress along the way. Try to avoid or at least payoff credit card loans and personal loans as early as possible. Both these are extremely bad for your financial well-being.
● The crisis throws open opportunities – Time and time again we have learnt that ‘Crisis Throw Opportunities at You’. Today in this crisis, many have discovered how one can still run a business very differently, by using the very technologies that would otherwise have been turned down or postponed. The crisis has not only changed working environments but has also given new wings to some emerging sectors, like HealthTech and EducationTech. People can use the crisis by keeping their eyes and ears open to new opportunities and reimagine and reinvent what they do. A crisis is a time to figure out what is needed afresh in the changing environment and how you can plug in your skills. The crisis has made us think ‘out of the box’. In fact, many have created a totally new box as well.
● Patience! This Too Shall Pass - People should not pay heed to fake news doing the rounds on social media. In the month of March, when the market was crippled with the effect of the pandemic, a huge number of investors either sold or stopped their investments. The ones who showed their patience during that time and continued their investments, are today reaping the benefits as the market is touching new heights daily. Therefore do not panic but do take precautions. Humans have withstood the onslaught of crisis in every century. We have overcome such challenges with our concerted efforts. All we need at this juncture is the right information, patience, determination, and cooperation.
The author is Director, Ventura Securities