When market is volatile, investor flock to the perceived security of shorter term investments. While short term investments have a role to play as part of a diversified portfolio, using them incorrectly can undermine your long term financial security.
People often "park" their capital in a safe, low-yielding investment until the market settle down, and then move it to a more appropriate long-term vehicle. Too often, however, they wait too long. The potential costs are high. Keeping your investments in low-risk/ low-return vehicles for too long can prevent you from achieving your long-term goals.
Conservative "no-risk" investments such as money market funds don't protect a portfolio from the erosion caused by inflation and income tax. Over the long term, inflation is a far more serious risk than market volatility. For example, $300,000 in savings now will be worth only about $200,000 in 10 years if inflation averages 3% annually.
Over 20 years, the same rate of inflation cuts the nest egg to $163,138. Although inflation has been low for the post few years, over the past quarter century the average annual rate of inflation has been more than 5%. Inflation takes a bite over the short term as well. Suppose that our conservative investments pay 5% a year. if inflation average 3%, your real return is just 2% per year. And if that income is subject to a marginal tax rate of 40%, your return drops to 0.
The most effective way to produce stronger returns and protect against inflation erosion is through equity investment such as growth mutual funds. while equities can be volatile over the short term, in the long term they have historically outperformed fixed income and money market investments and outstripped inflation. Outside a registered plan, equities bring beneficial tax treatment. while interest income is full taxed, capital gains are taxed on only 50% of their value and dividends from Canadian companies qualify of the federal dividend tax credit.
To protect your portfolio against short term market volatility, you need to diversity. For example, along with equity mutual funds your portfolio should include some bond and money market funds. Investment should be spread out across a number of geographical regions and encompass more than one investment style.
Being there for your parents when they need you financially is the most basic thing you can do, and it doesn't have to strain you anyone in family. Your parents are the two people you should forever be indebted to - not just for bringing you into this world but also for raising you well. All the effort, time, love, money and sacrifices that they put in for you cannot be reciprocated in the same measure, no matter what you do. It's not about paying them back in cash or kind; it's about being there for them in their old age in all the ways you possibly can. But sometimes, providing financial support to your parent can cause argument with spouse. If Your partner perceives it as a financial burden on the family, there are a few things that you can do:
1. Conversation with your spouse:
This is a conversation you and your partner should have early in your marriage. Instead of giving money to your parents secretly, you should sit with your spouse and have an honest conversation. Let them know why it's important for you to make this contribution to your parents and show them how it's going to affect the family budget.
2. Get your siblings involved:
If supporting your parents is a regular thing and not a one time situation, it's best to get your siblings involved. Usually, one sibling end up financially supporting the parents more than others. This can build necessary financial pressure as well as resentment, often leading to a strain in family dynamics.
3. Have a conversation with your parents:
It's important to have two conversations with your parents. The first one is to understand their financial condition and how they are managing their expenses. It's good to figure out how much help they need. The second conversation should be after you've spoken to your partner and siblings and decided how much you can contribute. It may be a little awkward at first, but its best if everyone involved knows exactly how money matters are going to be dealt with in the long run. This transparency will help you maintain a healthy family bond. When your parents know how much you and your siblings will contribute and how frequently, they can handle their budgeting and expenses better too.
4. Think of other ways to help:
In addition to helping your parents financially, you can help them strategically too. For instance, you could get them a comprehensive health insurance policy with all the necessary add-on. You can also help them with financial planning and investing. Another way to help is by giving them time. This could mean taking them for regular health check up or picking up groceries for them every month. If you stay nearby, dropping by to have lunch with them once a week could be a great way to show that you care. The intention is just to interact and have a good time.
5. Prioritize your family goals:
When you're married and have children, your priority should be your family. of course, this doesn't mean you should forget your parents. However, you shouldn't be helping your parents by compromising your own family's essential needs. There's a way to manage both, and for that you need to spend some time planning your finances.
In other words, you ought to set a budget, build a healthy emergency fund, have health insurance as well as insurance for assets such as car, home etc. and know your future financial goals and strategically invest for them.
6. Maintain a level of privacy:
For both you and your spouse, it's healthy to maintain a basic level of privacy - not just when it comes to offering financial support to your parents but in general. Having a joint account for household expenses and common investing goals is important. But having a personal account for personal spending is essential too. As adults, you and your partner need that space and freedom to be able to spend your money from your personal accounts as and when you like without having to justify each expense. There's nothing wrong if you indulge in personal expense from time to time. Nobody can hold you accountable as long as you're meeting all your family and joint obligations first.
Remember that having these conversation and figuring things out will take time and patience. So, maintain your cool and put your personal finance skill to use.
As an investor, just think about the goods & services that we use in our day-to-day life. It could range from ordering food online, watching movies on Netflix, placing orders for an eBook on Amazon or even searching something on Google. Many of these companies have their base outside the country and are not listed in Indian stock exchanges.
Why Global?
The benefits from international diversification were empirically demonstrated in financial literature. These empiric have shown that by diversifying across nations whose market cycles were not perfectly correlated, investors could lower the risk of their portfolio returns at the given level of expected return. The top performing companies keep on changing every year. Thus, it does not make sense to concentrate to mare all your investments in a particular asset class. Another reason is to take advantage of the depreciating currency. So, it is a good idea to have a globally diversified portfolio.
To invest in the shares of international companies, as an investor you need to open a separate demat and trading account with a recognized and authorized broking house. Directly investing in overseas shares involve significant amount of research and the right mindset. At the same time, one could also go for Exchange Traded Funds (ETF). Such funds normally track an index and there are a few Indian fund houses that already have ETF based on international indices such Nasdaq and S&P 100. For investing in such funds, you can use your existing demat and trading account. This is probably the easiest way for investor to have an international exposure.
For instance, a popular fund house offers indeed funds which track the US S&P 500 and Nasdaq 100 indices. To invest in such funds, there is no need to have any separate trading account. Investor can invest in these funds like any other typical mutual fund either directly or through distributor. Some investors may have views against global diversification arguing that everything is so interconnected today that overseas investment may simply overlap domestic ones but that is not the case as companies tend to act in ways that means according to the situation in their country of domicile. They tend to respond to local economic and geopolitical events more than events outside their borders.
To conclude, it is prudent for investor to branch out globally and international diversification definitely helps in managing risk and positioning your portfolio for long-term growth.
Retail investors have witnessed drastic erosion of their portfolio value accumulated over years for their long term financial goals. They are unnerved by this market volatility. This uncertainty is not limited to investor's community, leader across the globe have to take a tough call- the trade off between protecting health and protecting the economy. Life saving getting eroded in a short span of time can come as a big shock, but investors should not panic as all is not lost unless one exists the asset.
Post Covid-19, your priorities should be to try & reinstate your income level to the earlier levels and reassess your risk appetite as per the current situation and make changes to your investments as may be required as per the new risk profile to enable you to reach your financial goals on time.
Longer Time-Frame
Investors who have a longer time frame to achieve their financial goals are better off and should not worry too much about this correction. They should continue to follow their investment and asset allocation strategy as markets will rebound over time. Moving overhead on equities to capitalize on the correction to recoup the losses (investment goal amount) by large lump sum investment is also not advisable. A staggered approach over 4-6 months in quality stocks/funds can be followed; but that too will be dependent on the liquidity situation - which needs to be reassessed in such uncertain times.
Building on cash reserves/emergency funds is ideal given the known unknown in the current situation. Individuals should bear in mind all possibilities - layoffs, pay cuts, early retirement etc. before redrawing their investment plan. Depending on how many years you have to your retirement, you may either need to scale down your retirement corpus goal or delay your retirement by a few years in order to achieve the desired corpus. You should also revisit your existing life and disability insurance policies to determines whether they are sufficient to meet your needs. Investors who have immediate needs can consider redeeming their debt portion gradually and then perhaps sell equity holdings. But you have to ensure that debt-equity allocation is not severely damaged.
Prioritizing investment goals
Taking a short term loan to meet the immediate investment goal; instead of redeeming investment assets at such low prices should also be considered. Prioritizing one's investment goals and trading off shorter term goals for long term goals also needs to be considered. One important lesson we have learn in this crisis is implementing a gradual exit strategy - investors who needs a corpus in 'X' years should gradually shift from equities to debt (for parking) a few months before their remaining investment time frame; by doing so one would not see massive portfolio drop due to such untimely and unexpected market corrections. Investors can use the tools of systematic withdrawals or systematic transfer more often to their advantage.
Overall, asset allocation and diversification (within and among asset classes) are the fundamental financial planning tools that you need to follow diligently to ensure some safety net in such downturns. In case their is a large shortfall in any of the goals which are due 3-5 years away, then you can ramp up savings rate for a few quarters and try to make good the shortfall, provided your income sources remain unaffected.
Investing over the years, one forgets to adhere to the asset allocation set up initially. If due to run-up in markets, equity allocation has increased from established 70% to 80%, the investor needs to shift the excess 10% to debt or other asset class. The same should be practiced after market crashes; allocating more to equity would be beneficial at that time. Re-balancing and strictly adhering to asset allocation should be practiced once every 6 months.
While these are unsettling and challenging times, it is important that we don't react out of fear. The decisions you make today will impact your long-term financial planning goals. Investors could grab better returns in the next few months/quarters if they stay invested during market fall or add equity (via SIP in quality stocks/funds for a few months)/ Investor should in normal times be patient and continue to remain invested.
Having said that, they should at regular intervals undertake due diligence and review their portfolio stocks, schemes and now, even debt papers; re balance their portfolio and adhere to their asset allocation strategy. A more cautions investment strategy (capital protection) is warranted in the short term; not only to tackle the Covid-19 shock but also for the second/third round of effects after this storm passes.
