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Lessons from disasters: 5 things to do now

Published on Wed, Jul 12, 2006 at 16:04 | Source : Moneycontrol.com

Updated at Mon, Jul 17, 2006 at 16:36

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It wasn't the first time Mumbai faced and survived this. Seven blasts one after the other rocked Mumbai yesterday evening. While the blasts underlined the ugly face of urban terrorism, it was a grim reminder of the everyday uncertainty that the normal Indian investor lives under.

So what are the key lessons for intelligent investors from the changed global reality where terrorism can strike anytime anywhere anyplace?

Plan for the worst, hope for the best:

Some months after the 9/11 tragedy, the legendary Warren Buffet was asked his opinion on the increasing uncertainty. His characteristic response was that all he was uncertain was that over the next few years there would be a major terrorist event again in the US mainland. The markets will go into a deep fall as a result, but over time will recover back handsomely. We can extrapolate the same wisdom to the entire world. Today there is no place "safe". So how does an individual plan for this uncertainty? By planning for the worst. And the first step is taking out insurance - for the life of the breadwinners in the family, for the house and household goods, for major capital goods, especially the vehicle. Ensure the coverage is comprehensive and is adequate in monetary terms to either replace the capital good or house, or generate enough cash flow for the family to maintain their lifestyle if the breadwinner is no longer there.

Write that Will:

"It can't happen to me" is a myth. Speak to a lawyer and draw up a simple will, get it witnessed and registered. It will cost you very little, but it will save your near and dear ones a lot of pain in the case of any unfortunate event. Remember the people working in the heart of the US in the World Trade Center or the passengers in the London subway, who didn't deserve it. You owe it to those whom you love and want to take care of, to draw up that will.

Joint Accounts

Move all bank accounts to a joint basis, with an either or survivor clause. Same with your mutual fund holdings, bank lockers etc. Add the names of your family members to share holdings, property, and other holdings. It will make succession much simpler. I remember a case when I used to work for an international bank. The wife of a senior vice president in a Latin American country was shot dead in a robbery at a supermarket she was shopping in. Unfortunately today that risk is much nearer home. And we need to act with resolve to mitigate that risk.

Update those Nominations

You can nominate your dear ones in most financial instruments - bank accounts, bank lockers, fixed deposits, provident funds, post office schemes, mutual funds. Make a comprehensive list of all your holdings, and do the nominations today. It takes about one minute to fill the easy forms. Keep copies of the forms in a file and leave copies with your lawyer/accountant as well. Write a note with all your holdings details and the contact details of your banker, your accountant, and your lawyer if any. If your bank account or credit card also offers accident insurance, ensure you take the nomination form for the same and update these as well.

Diversify, Diversify, Diversify

Such shocks serve to underline the absolute essentiality of portfolio diversification and asset allocation. In these times, being rational is essential. Yet, investor's emotions have a way of overwhelming and frustrating basic investment logic. Proper portfolio diversification simply involves understanding three realities: your financial goals and responsibilities (funding retirement, children's education, children's marriage, buying your own house etc); your risk tolerance (what level of variation in returns are you comfortable with); and finally, what is your time horizon (how many years till your child's graduation, marriage, how many years to retirement et al). Mapping these will help you to determine your investment landscape in terms of an asset allocation. Once an intelligent, diversified asset allocation is decided, you need to determine your portfolio rebalance parameters and execute your plan. After that all you need is an ability to shut out the market noise and such shocks to the financial markets, and stay the course with your ideal asset allocation. Keep gold, bank deposits, mutual funds, real estate and post office schemes, all in your portfolio.

CONCLUSION

You just don't know what's going to happen. Post World War II, this is perhaps the period with the maximum uncertainty that the ordinary person is living through. Hence you have to think about the kind of world in which we live today. In this case, where the enemy is unseen and ubiquitous, it's difficult to know what to do about it. Once you realize this, life is easier. It's natural to have a tendency to think that you know what you don't know. When events spin out of control, this resilience is shaken. In a world that is exceedingly random, the best way is to hedge all the risks you can and stay with it. And, once that is done, enjoy life with a lighter heart and with gratitude for what we have!

- Ajay Bagga

The writer is CEO, Lotus India AMC.

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