Some of the most common queries that any Financial Advisor would get from his/her clients are
Do I still invest?
Should I clean out all my investments?
The market looks very lucrative now, shall I put in all my savings now and invest?
My attempt is to answer these questions broadly while Financial Planning varies for every individual and family.
Due to the financial awareness and past history most of the investors know that this is a golden opportunity to invest and we get very few such occasions, but there is another side to this where majority of people are waiting on the sidelines to invest until the stock market improves.
While many of us are in that “Lets Buy now” mode or “Let me sell everything and sit on cash”, keep in mind we will never know the bottom.
“What the wise man does in the beginning, the fool does in the end.” holds very true in this case.
Warren Buffett has said very much the same thing even more concisely: “First the innovator, then the imitator, then the idiot.”
Some caution before you become an innovator or risk being an idiot
Some basic rules :
1) Emergency Savings – Due to the present scenario there’s a good chance that your income or cash flow might be affected. Look at your finances and make sure you have at least a 6 month emergency savings. Forget about investing or Get Rich quick plans. Investments cannot take the place of emergency savings.
If you are out of work right now or get a pay cut and do not have any money in the bank to tide yourself over you may simply have no choice but to dip into your stocks or mutual funds while they are down. This will be a big blow to your finances.
2) Do not get into *FOMO* mode – Fear of missing out . Just because everyone is investing doesn’t mean you also have to go and invest your entire savings. Follow a simple thumb rule and you will not get into trouble. Invest only the money that you do not need for the next five years.
3) Time Horizon — This period is probably one of the best times to invest in stocks and equity mutual funds. By best period I mean it can be anywhere from 6 months to a year or more. So put in only that money that u will surely not need for the next few years.
4) Do not obsess on your notional losses — The stock markets are down more than 30%-40%, back by 4 years. The wealth that you accumulated over the years has eroded in value. Wealth will return to its value after the crisis has blown over. Do not keep looking at market numbers.
5) The Big Question is WHEN ? Do not wait for the right time. Before you know it, the right time will come and go. Invest slowly and wisely. Time in the market is more important than timing the market.
Some historical data :
Year 1992 – Sensex down by 54% in a year and up by 127% in next 1.5 years
Year 1996 – 40% down in 4 years and 115% in next year
Year 2000 – 56% down in my 1.5 years and 138% up next 2.5 years.
Year 2008 – 61% down in 1 year and 157% up in next 1.5 years
Year 2010 – 28% down in 1 year and 96% up in next 3 years
6) Are you well protected ? – Unfortunately , we need a calamity like this to make us realise how uncertain times are. Look into getting a life insurance (proper term insurance) and a health insurance, otherwise you will end up spending money that you never had.
Please feel free to spread this important message to your friends and family.
Connect with me Sanjay Rao, a financial planner, to help you out in these tough times.
My coordinates +91 9673895854