Investors look to flight-to-safety strategies
Despite all the stimulus measures, the stock markets continued their relentless fall with investors pulling out money from riskier assets as if there’s no tomorrow
Past one week witnessed a frenzy of activity along with panic and govt initiatives in an effort to control the latest virus outbreak. This is almost once in a century pandemic, which is shaking the world over due to the pace of spread.
World leaders have been fighting to resolve it together while the financial repercussions have begun to unravel. In a bid to arrest the sudden liquidity concerns, the central banks have resorted to relaxed monetary policy and cut the interest rates down. The governments have also started a coordinated effort of loosening the purse strings by announcing fiscal stimulus packages.
Despite all these measures, the stock markets continued their relentless falls with investors pulling out of money from riskier assets as if there's no tomorrow. Same is the case with other asset classes and not even sparing the usually safe haven of yellow metal 'Gold.'
This is because unlike the earlier events of Great Financial Crisis, dotcom burst, etc., this is not a financial or economic crisis, but related to health factor. People are comprehending the possible risks, albeit, slowly and are realizing the greater impact on themselves.
Finance and economy are not on their top-of-mind as is health and safety. The behavior is not an exhibition of flight to safety, but of survival. The foremost thought that's running on most of the minds is of continuation of life, the basic survival, would it be ensured of.
In such scenarios, it's difficult to assume that a percentage correction is apt or not, as there wouldn't be any models built to consider the impact to discount a proportion of humans missing. This kind of less than one-in-a-million settings can't be planned for.
What could be done, then? there's range of suggestions from closing the stock exchanges to curtailing the short selling to regulator to act, etc. Such kind of extreme measures could add further owes to the current fragile psyche of the investors and also reduce or may even destroy the confidence in the capital markets.
The ideal response would be to allow the market to find the bottom by continuing the normal functioning, at least as long as the virus directly impacts the functioning. That way the panic would find its own way to semblance at some point of time.
What should the investors do during this mayhem? Should they run for cover? The world has seen the expanse of other viruses in the past and the toll it had on humans.
Also, the resilience of regulators, governments, institutions need to overcome and thrive from various economic and financial meltdowns in the last century. On a philosophical note, those events seemed like cycle of life, but how do one handle as the event is experienced.
At these situations it's very difficult to follow the Buffet's wisdom of 'be fearful when others are greedy and greedy when others are fearful'. And it's good to act sometimes to give solace to your irrationality also.
This provides a greater peace and stability of thoughts so that rationality can be brought back. So, if it requires pulling out part of the equity into cash, it should be done. Like investment, the disinvestment could also be well planned.
As the market correction was in a sizable portion of value in less than a week, it sends pangs to our thoughts. Remember the questionnaire we filled when the risk profiling is done. How would we respond for a 20 per cent correction, if you've the sheet, look at it then verify what's the response (mentioned) when a further 20 per cent of the portfolio is eroded?
Now, that should form as a ready reckoner for you to act now. If you've not done, it's not completely bad time to do and if you've done check how your current thoughts to that of what you'd mentioned earlier, then reevaluate and act. One has to understand why it's difficult to react to situations as they unfold unlike in a questionnaire.
The other important factor to be considered is the asset allocation. Yes, the recent correction is not limited to equity alone, so ideally would suggest to not to take any knee-jerk reaction. Review the asset allocation with regards to the timelines of the goals.
That should provide some insights into what could be done. Also, remember that the market provides opportunity at every instance and be flexible to explore as a tactical allocation.
Particularly, when there's erosion across the asset classes, one may find attractive levels to take advantage be it equity or debt, remain openminded. Above all, remain safe, healthy and follow as instructed by the government authorities.
Remember that you could always make money as long as you live to see another day.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at email@example.com)