We have no intention of looking at the past through rose-tinted glasses, but do believe that deep crises provide challenges and instruction that alter the course of our existence.
The year 2020 encapsulated it brilliantly.
A virus brought the entire world to its knees, something we could never have envisaged. In the bargain, it disrupted consumption and education and business. In all this, what was evident to survival was the ability to adapt and learn.
We asked Mahesh Mirpuri to share with us the insights he obtained in 2020.
He captured it in one single sentence: Be prepared for the worst; Stay optimistic about the future. It is not a contradiction. In his own words, he explains it in an actionable format. Read on.
How to be prepared for the worst.
Those most affected by the COVID-19 virus were small businesses and their employees. There were huge losses, and the fall out was retrenchment and steep salary cuts. The general manager of a large establishment with a huge pay cheque, found himself agreeing to get basic minimum pay as per government norms for the last few months. He was fortunate not to lose his job.
- If you do need to take on personal debt, keep it to the minimum.
Debt is a silent killer. Those stuck with monthly payments (EMIs) which were the result of buying expensive cars, phones and even that extra apartment, suffered the most. Delay in payment of EMIs will mean you have to pay a huge penalty and bounce charges later on. It will also affect your CIBIL score. But for many, it was a struggle to pay off the EMIs.
If you cannot pay off that credit card fully every month, stick to debit cards only. Freedom is being debt-free. And I have observed that much of the fancy stuff we accumulate is not necessary. Live within your means.
- Keep an emergency fund AND use it for emergencies only.
This is evident. A black swan event has only underscored the need to have an emergency fund and to use it for emergencies only – not for personal consumption. Not to be touched when you see a huge discount sale, or for stock market trading.
- Don’t scoff at insurance.
Get your life insurance and medical insurance in place. You need to safeguard your family if you are the prime bread earner and everyone needs a medical cover.
Focus on developing skills that will help you in various professions or business. Keep learning. Keep equipping yourself. Your profession is what will earn you a livelihood. It will help you build wealth. Don’t take it lightly. In this insane bull run, many have convinced themselves to be great traders and view investing and trading it as a source of income. Your investments should be your source of income only during retirement.
- Stick to asset allocation.
This is my favourite mantra. Because it actually works. It’s not easy. It was most difficult to stick to this in 2017 when the market was rocketing. Because it takes discipline and strength to keep to an asset allocation framework in extreme markets.
I worked with the numbers. A lumpsum invested in a multi-cap fund (60%) and in a short-term bond fund (40%). Over a 3-year period, from March 23, 2017 to March 23, 2020, the Nifty 500 TRI returned -6.3% annualised, while the portfolio that was annually rebalanced delivered 1.2% annualised returns. The portfolio was positive when the index was negative.
If the same investment continued till January 2021, the Nifty 500 TRI would have returned 11.2% and the portfolio, 11.4%. The rebalanced equity: debt portfolio matched the stock market rise to a new high. The journey has been in sync with the index.
Additional reading:
Why you must be optimistic about the future.
Human ingenuity has overcome hurdles problems. Humans are resilient and we find a way to cross insurmountable problems. Being optimistic gives you the enthusiasm to face life. The market is certainly no place for pessimists. Even the most die-hard bear knows that at some time he will have to make way for the bulls. Being optimistic helps even when investing. A positive mind set made many investors see opportunities and I personally know many who kept investing from April and have made tremendous gains. Many others continued their SIPs which work best in volatility.
I deal with many investors and a few have been dilly-dallying. A delay is costly. Some who spoke to me in June are still sitting on the sidelines. The markets have seen a dizzying rise. And those who allocated when the market was down certainly have a good start which gives a lot of confidence in one's investment journey. But to allocate when the market is down, one needs to be optimistic.
Those who panicked and redeemed in the months after the lockdown was announced lost big. Do not stop SIPs and withdraw. Stay the course when you have a plan. Those who are pessimistic will be the ones to panic and act impulsively.
Once again, I looked at the numbers of a systematic investment plan, or SIP.
A 5-year SIP ending on March 23, 2020 in the NIFTY 500 TRI delivered a negative return: -8.7% annualised. The same SIP if continued till January returned 12.4% annualised! Isn’t that unbelievable? A difference of nine months gives such a compelling return. A CAGR of 12.4%.
I conclude…
Being prepared for the worst will not paralyse you when a crisis hits. You won’t be stunned into inaction or have impulsive reactions. You will be in a position to adapt and bounce back quickly. But you will do that only if you have a positive frame of mind.
Hence, I reiterate: Be prepared for the worst; Stay optimistic about the future.
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