Your portfolio is down 20% since March 2020. You are concerned whether you can recover the losses in time to achieve your goal three years hence. If this is your story, you are not alone. While it is hardly comforting to know that many like you are suffering from significant portfolio losses, the question remains: What should you do now? In this article, we show why you have limited choices to repair your portfolio. Yet, you do not have to be overly worried about not achieving your life goal!
Suppose you sell your loss-making equity investments now and invest the proceeds in fixed deposits, earning, say, 5% post-tax returns. What if you have to earn 8% to accumulate the money required to achieve your goal? Investing in fixed deposits is a sure way to fail in achieving your objective!
Alternatively, you may be tempted to invest in gold, given the handsome returns it has generated in the recent times. But, gold typically rises when there is world crisis. What if the world economy revives over the next three years and gold underperforms the stock market? Your decision to switch to gold could lead to regret.
There is, of course, another alternative. You can increase your monthly savings over the next three years, invest in bank deposits and make-up for the existing losses in your equity investments. But can you? Several have lost their jobs, and many have taken a salary cut. During these uncertain times, expecting to increase savings may be difficult.
So, what should you do? Your optimal course of action is to continue your existing systematic investment plan (SIP) in equity. But what if the stock market does not recover in time to achieve your goal?
Overestimating regret
We typically overestimate today as to how an event that could happen in the future will impact us then. That is, when asked today, how you would feel if you win a lottery a year hence, you will overestimate your future happiness. It is the same for negative events, including failing to achieve goals!
That means, despite what you believe today, you may suffer less regret even if your equity investments do not recover existing losses and generate handsome returns.
But without equity investments, you have small chance of achieving your goal for reasons mentioned earlier.
And, if the market does not recover in time to achieve your goal, you may still find ways to bridge the gap in your portfolio three years hence. Maybe, your income levels will go up then and you can confidently borrow to bridge the shortfall. Or, perhaps, you will use your self-occupied house as collateral to raise the required amount.
The more gainfully occupied you are in the present, the less you are likely to be worried about the future.
Therefore, continue your SIPs in equity, unless your income is volatile because of the current economic conditions. If so, invest only in bonds till such time your income becomes stable.
Finally, should you, based on expert opinion, continually switch between equity and bonds in the hope of recovering your existing losses and improving your investment returns? As Neils Bohr said, “Prediction is difficult, especially if it is about the future!” Do not let experts’ predictions about the economy, the stock market and gold drive your investment decisions.
Some did correctly predict the 2020 pandemic and the 2008 sub-prime crisis. But were those same individuals successful with all other predictions? It is difficult to consistently, successfully predict market movements and economic events. For your part, continue your existing SIPs in equity.
(The author offers training programmes for individuals to manage their personal investments)
