It is difficult to enumerate how the year 2020 has changed our lives. As we approach the end of this painful year, let us look at how it impacted the investing and financial landscape and the lessons that investors should derive from these changes.
Health insurance is not an unnecessary expense
If there is one key lesson from COVID-19, it is realizing the importance of having adequate health cover. Before COVID-19 struck, very few people took health insurance seriously, content as they were with the group insurance cover from their employers. But group insurance covers vanish when a person loses his job. You need to buy health insurance cover on your own.
More importantly, the hospitalization bills of many COVID-19 patients have run up to lakhs of rupees. This means a Rs 4-5 lakh health cover won’t be enough. A family of four needs a higher cover of at least Rs 10-15 lakh. Also, individuals should stop seeing medical insurance as an unnecessary expense and consider it an essential product that they must buy.
Everybody needs life insurance
The spread of COVID-19 has also made us realize the fragility of life. It is sad that a tragedy of this magnitude was required for people to understand something as basic. A survey by a life insurance company shows heightened anxieties relating to unemployment and untimely death of the family breadwinner. Hopefully, it will push individuals to make the right choices when it comes to buying insurance. Though some people think pure protection term plans are a waste of money because they don’t give anything back on maturity, these low-cost policies are perhaps the best way to take life insurance cover.
Keep an emergency fund
COVID-19 caused widespread job losses. Even if they didn’t lose their job, many people suffered salary cuts. Those with huge financial commitments such as mortgage payments and other loans faced the brunt of the problem. Thankfully, the RBI announced a moratorium in May, which provided temporary relief for borrowers. The big lesson for loan customers, as also everybody else, is to always maintain an emergency fund. Even if your financial position is sound and everything is hunky dory, unforeseen events can upset the applecart. Make sure you have enough money stashed in a liquid fund or a bank deposit that can be readily accessed. The rule of thumb is to have an availability of at least 5-6 months’ expenses.
Don’t get unnerved by volatility
Another key lesson for investors is not to react to market volatility in a knee-jerk manner. After a precipitous plunge in March, the stock markets witnessed extreme volatility over the next few months. The ups and downs of stocks are inherent to equities. As we have seen, the indices bounced back and touched all-time high levels in December. Investors who lost their nerve in March and exited, turned their temporary losses into permanent ones. Conversely, those who stuck to their holdings and even invested more, made stupendous gains. For mutual fund investors, the simple lesson is to continue their SIPs, unmindful of the noise in the market. Investors who stopped their SIPs in March-April denied themselves the opportunity to buy at low levels for the next eight months.
Rebalance your portfolio periodically
Though you can’t avoid the volatility in stocks, you can reduce the risk by rebalancing the portfolio. Rebalancing restores the original asset allocation of the portfolio. It is recommended that you rebalance at least once a year or after a major market development, where a particular asset class moves up or down by more than 15-20 percent. When the Sensex fell 40 percent in March, it was a signal to rebalance. Investors who followed this rule and bought in March would have made a lot of money this year.
Focus on needs, not on wants
The pay cuts and job losses due to COVID-19 also made households review their budgets in 2020. As the pay cheque contracted, or stopped altogether, many households learnt the hard way to subsist on less. Though things have now improved, many people still face an uncertain future. Even households that have not faced any income loss need to avoid unnecessary expenses. If you throw ‘wants’ out of your household budget in the coming year, you should be able to fit in all your ‘needs.’
Don’t plan on the basis of future income
The loss of income also underlined an important lesson for investors and consumers. One should not make plans on the basis of future income unless it is certain. Before COVID-19 arrived on Indian shores, a lot of people might have concretised their plans of buying houses, vehicles and such other big-ticket expenses. And why not? Most salaried people usually expect a raise in the April-June quarter, and plan accordingly. But COVID-19 made these plans come unstuck. In fact, many people were forced to opt for the moratorium on loan EMIs because they were expecting their incomes to go up after March. In reality, many of them saw their incomes go down, even drop to zero.
In the current environment, always select cautious optimism over aggression!