Your personal finance and investments in these unprecedented times
If you are like the average person, you probably are confused and concerned as far as your finances and more specifically your investments are concerned. It has probably not escaped your attention that while the economy world over is down in the gutters, the stock and bond markets worldwide are jubilant beyond expression, many scaling all-time highs. Just think for a moment: we are in the midst of a pandemic we still haven’t figured how to get out of; we are having huge sectors of the economy that are practically closed (think Airlines, Travel/Tourism, Entertainment, Hospitality to name a few) and yet all our stock markets are jubilant. Surely, you may argue that the rally is fuelled by the beneficiaries of the changes that we are having to go through and that would be true; to an extent! The more bullish amongst us will also point out that markets are forward looking animals and are discounting for the situation beyond the pandemic, instead of focusing on the present situation. Again, there would be a kernel of truth to it.
While the arguments above do have merit, but a lot of it surely has to do with fiscal and monetary policy decisions being taken. Plainly put, the intervention by the Governments and the Central Banks through money borrowed from the future and/or printed along with forcing interest rates to levels not thought possible even a decade back. Minus the kind of stimulus we are seeing now, (as well as over the larger part of the last decade) the markets would not have the means (in terms of the liquidity) to remain rational enough to bid even the beneficiaries of the current scenario anywhere near the astronomical levels that we see them at.
Where does that leave you and me? If you are like most people, you probably have a career in industries other than finance and probably have a family to cater to with other obligations as well. In other words, you probably are not in a position to take speculative bets on a substantial part of your net worth. That is not something you should be doing anyway without a certain degree of knowledge and experience under your belt. In case you have not yet noticed, the best asset class for parking the bulk of your net worth in has been destroyed and rendered dangerously speculative, courtesy the policies mentioned above. I am talking about bonds and other fixed income instruments.
Consider this: an investment into 10 year US T-bonds at current rates can easily wipe out 10-20% of the money you invest, should the interest rates move up just by a few hundredths of a percentage point (called basis points)! This, in an asset which practically has zero chance of default. You may of course decide to invest in municipal or corporate bonds which would yield you somewhat higher income, but will bring in varying degrees of default risk alongside. Now, most of you might not have the time and/or inclination to apply enough of due diligence to assess the default risk of these bonds.
If you are amongst the more informed and knowledgeable, you probably have taken the initial steps to educate yourself financially and have sought it through listening to experts, financial media, newsletters and the like. In doing so, you would surely have noted the diversity of opinion among the people you have chosen to listen to. While it is definitely good to be exposed to diversity of opinion, yet the basic conundrum remains on exactly how you allocate what you save in order that it remains, retains its value and grows to the kind of nest egg that you would want it to become.
While most opinions would acknowledge the long term problems that the present day policies imply, you would have possibly noticed three distinct approaches that were being recommended:
Time and again, if you have any financial exposure, I am sure those are the three broad strategies that you get bombarded by and probably are having a hard time decide which approach above should be the one that you should subscribe to.
Believe me, the broad asset allocation decision is the most crucial decision in your financial life and has the maximum repercussion on how much you end up with; rather than that hot stock tip that seems to invade you from all directions. You can hire as many finance professionals you like, but at the level of the asset allocation decision you need to be equipped enough to take that call on your own. Sure you can have people work out a plan for you, but make sure that you understand and are comfortable with the asset allocation decisions being made, including rebalancing on the right opportunities as they arise. This will enable you sleep peacefully and improve your chances of coming out on the other side of the storm relatively unscathed.
CFP, CFA (Foundation), PGDBM, Indian Institute of Management, Calcutta