Liquidated Investments during the COVID-19 Pandemic? Here’s How to Rebuild the Portfolio
September 14, 2021 Mutual Fund
During Ganesh Chaturthi, Sneha visited at my residence and we spoke about her investment journey. She said “Mitali, during the pandemic I liquidated my investments and redeemed them for the same amount I had invested two years back. Thankfully I did not bear any loss, but neither did I gain any returns.”
“The market scenario was such that my peers who had invested with me started liquidating their investments and in that panic even I decided to liquidate my investments. The previous year was tough… I received a pay cut, but now things are going fine and I am planning to start fresh with my investments.”
To which I responded, “Sneha, as far as I remember you invested with a long term approach for about five years. It would have been prudent to first analyse your portfolio with the market scenario and understand thoroughly if there was any need to liquidate or you could have hold your investments.”
“Your decision was influenced by biases and it made you lose out on your investments which could have generated optimal returns when the markets recovered. Long term investing helps you create wealth and reduces the risk of short term volatility.”
Sneha replied, “Yes, I do understand that I made an unworthy decision on my investments and now I am seeking to rebuild an investment portfolio from scratch. I need your help to construct a robust portfolio that can survive the unfavourable market conditions.”
I replied, “Sure, but you must ensure to not repeat the same investment mistakes and make informed investment decisions from now onwards.”
[Read: How to Prevent Investing Mistakes for a Robust Investment Portfolio]
Undeniably, we are currently navigating through uncertain times and it is essential to build an ‘All-weather’ investment portfolio that can weather any storm. The COVID-19 pandemic has put the spotlight on the importance of a financially secure future.
If you have liquidated your investments amid the pandemic crisis like my friend Sneha and now plan to rebuild your investment portfolio, here are the steps you can take to reconstruct a robust investment portfolio that creates wealth.
1. Maintain an emergency fund
One thing that pandemic has taught us is, uncertainty can strike anyone at any time without prior notice. To be prepared to survive such emergencies, you must rebuild and maintain an emergency fund.
This could be money set aside in a regular savings account fund or in liquid or overnight funds as per your suitability. An emergency fund must suffice the expenses for 12-24 months including loan EMIs. This will be your safety net in crisis and you will not need to liquidate your investments.
2. Reset S.M.A.R.T financial goals
The first step is to review and redefine your financial goals, short term and long term. You may have set S.M.A.R.T financial goals in the past, but now you must reanalyse your financial requirements according to the existing circumstances and reset your financial goals.
You can start with a prudent budgeting exercise for goal setting. It will give you a clear view of your existing cash flows, expenses, and the amount you have for savings and investment purposes. Get a realistic picture of your level of risk tolerance and do not take more risk than you can afford, as the markets by nature are supposed to be volatile.
It is best to have your portfolio strategy constructed according to your risk profile and the financial goals you set must be aligned with the investments you will make.
3. Regular investing and long-term approach
To rebuild your investment portfolio, it is essential to maintain long-term approach towards investments so you can gain the most from them. This involves a certain level of discipline, patience, and inculcating the habit of investing regularly. You can start making investments through the Systematic Investment Plan (SIPs) mode with as low as Rs 500 per month and gradually increase the investment amount or choose an SIP amount of your choice.
Regardless of your losses, stay focussed on your aim to rebuild a bigger corpus than before. SIPs help enhance your wealth creation journey with the power of compounding. Investing through SIPs is the most disciplined way to achieve your short-term and long-term financial goals. After all, tiny drops of water make a mighty ocean.
4. Allocate your assets as per your risk profile
With your financial goals, risk profile, and approach set, the next key step for successful investing is Asset allocation. It begins with the way you allocate your assets and reflects in the performance of your overall investment portfolio. The rule of thumb is to allocate your assets as per your risk profile and the life phase you are in. If you are in the accumulation phase and can afford to take higher risks, like Sneha, you may want to invest more in equities, and less in debt and gold.
It is also important to take calculated risks even if you are risk-averse. Advisably, take only as much risk as your risk appetite permits. However, if you shun taking any risks, it will get in the way of achieving your financial goals. Your asset allocation strategy must focus on achieving your envisioned financial goals.
Hence, assess your risk profile, allocate the assets accordingly, and construct a portfolio that adheres to your risk boundaries. Do not bite off more than you can chew.
5. Diversify your assets
First, analyse your earlier portfolio and evaluate its asset allocation. You must rebuild a balanced portfolio that can survive the uncertain times. Remember no two asset classes perform in the same direction at same time, thus you must diversify your investments in various worthy asset classes.
For example, if your previous portfolio was aggressive with high level of equity exposure, consider balancing it out with exposure to debt investments. Debt as an asset class is deemed less volatile than equities.
On the other hand, if you are a conservative investor with high debt exposure, consider investing a portion in equities; it is a vehicle for long-term capital appreciation.
Considering the current and near term environment that expects economic recovery and earnings growth, ensure that you have adequate balanced exposure into equities for long term, in debt and gold to mitigate the risk of volatility and counter inflation. A well-diversified portfolio can prove to be an ‘All-weather portfolio’.
Alternatively, you may consider a certain allocation to international funds that have global exposure and invest in schemes focusing on innovation and future growth prospects as per your suitability.
6. Periodic review of your portfolio
One of things that may have been detrimental to your previous investment portfolio in the past is the lack of a periodic review. Reviewing your investment portfolio periodically helps you better understand the health of your investments. It gives you an idea of the portfolio’s performance and you can evaluate which investments to eliminate or switch from that bring down your overall portfolio performance.
In addition, you can rebalance your portfolio to adapt with the changing environment or market conditions if required. However, a word of caution, you should make these changes in your portfolio by timing the market. If not done correctly, timing the market may lead you to make investment decisions influenced by several biases and this will increase the risk towards your portfolio.
Rebalancing your portfolio requires meticulous efforts and you should not take this step unless there is an absolute need to do so. You must analyse your portfolio on qualitative and quantitative parameters before you consider rebalancing.
Thus, you may rebuild your investment portfolio by following these steps; ensure that you spread your investments across various assets to gain optimal returns. You need not worry about the investments that you liquidated, instead focus on rebuilding your portfolio as early as possible.
In my opinion, it is essential to empower yourself with financial knowledge, as it equips you to make informed investment decisions and you gain more awareness of the market conditions. It will help you assess the situation and analyse your portfolio to prevent making any dubious decisions like liquidating your investments when it is not required.
This article first appeared on PersonalFN here
