It should have occurred to you by now that the stock market is more of a living entity than it is otherwise. It reacts to what goes around in the outside world and is ultra-sensitive to existential crises such as a pandemic. As an investor, wars or pandemics, irrespective of how mild or serious they are, are the last thing you want in the world.
The stock market is a barometer of crises making headlines, and it is not in your best interest to have crises such as a pandemic raging across the globe. But these are inevitable harsh realities, and you can’t help but find ways to cope with them and emerge a winner.
To that end, here are some investment strategies you can implement to pull through crises.
1. Do not time the market – Predictive analytics doesn’t work
It is not at all commendable to time the market during a crisis or a pandemic. For instance, take the case of 2020. It has already established itself as a volatile year with benchmark indices taking several turns at various points. It is not feasible to predict when the next market rise or fall would take place. The stock market tends to take a roller-coaster ride when crises loom large — as such, trying to time the market at such moments is not a wise move. The prescribed course of action is to keep investing moderately in a staggered manner, sit back, and watch.
2. Diversify your portfolio – Both across stocks and other asset classes
Diversification of a portfolio is the key to tiding tough times. That said, to safeguard your wealth during a crisis, it is essential to diversify your portfolio both across stocks and other asset classes. As things stand, a diversified portfolio is your best bet at pulling through a crisis or pandemic. To that end, there are certain equity and debt investments that offer attractive opportunities when analyzed from medium to long term outlook.
3. Reallocate your portfolio – Consider your financial goals, existing investments, and reallocate
When crises loom over the market, it is your responsibility to re-assess your financial goals and existing investments to plan a reallocation strategy. The main objective of this rebalancing strategy is to align your portfolio risk to the level you deem reasonable. The core objective of reallocation is not along the lines of maximizing returns, but rather to find out if your portfolio’s expected performance is proportional to your risk appetite. Therefore, it is essential to reconsider your financial goals and risk appetite to reallocate your portfolio.
4. Go for quality stocks – Add stocks having sustainable growth potential; avoid cyclical stocks
Quality is always your biggest asset as an investor. You can leverage it by adding stocks having sustainable growth potential, and also by avoiding cyclical stocks. Apart from helping you ensure a handsome Return on Investment (ROI), such quality-focused investment will also protect you from the brunt of another market crash. As an investor, it falls on your shoulders to formulate strategies to make profits and, at the same time, protect your investments from unmitigated drawdowns.
5. Hold some liquidity – Always keep a buffer
Holding some portion of investment in cash is an integral part of a good investment strategy. It will become a buffer against any unforeseen events. The retained liquidity also serves two more purposes: it helps protect your overall capital, and also allows you to tap new investment opportunities as and when they emerge. For instance, you can take advantage of deep market corrections or when some stock valuation is very reasonable.
There may be numerous other strategies along the same lines, but the ones mentioned above are some of the best tried and tested strategies with empirical backups. You see, investment strategies are important as they enable you to make a calculated move. In the meantime, you need to cultivate patience and discipline and back up your strategies with intensive research. A profound understanding of the market and its dynamics also works in your favor. The key to making it big is a strategic mind coupled with patience and discipline.
(By Pranjal Kamra, CEO, Finology)