Is your portfolio resilient to COVID-induced market shocks?

Fragile. If I were to pick one word to define the first quarter of the new decade, it would be this. Suddenly, we seem to have discovered the fragility in global healthcare systems, the financial markets and our lives. The questions we’re asking is this: Was COVID-19 and the impact on the markets and our portfolios really that unpredictable? Could we have prepared for the calamity – and later the opportunity to invest at lower levels – better?

It was only three months ago that everyone in the investment world was publishing their outlook and expectations for the year (and even the decade). But, today, those reports with fancy data and projections hardly matter as we battle an unknown. Stock markets the world over have fallen by over 30 per cent and you wouldn’t have found the word ‘global pandemic’ in the list of risks mentioned in any of the reports. Since we didn’t expect this, we call it a ‘black swan’ event – a term popularised by Nassim Nicolas Taleb in his books to describe an extreme, yet rare impact of an unpredictable event. We use it to justify something when we’re caught unawares, which we often are.

But, in a recent article written by Taleb and Mark Spitznagel, they say that, “had they (people) read that book, they would have known that such a global pandemic is explicitly presented there as a white swan: something that would eventually take place with great certainty.” And while that is true in the context of governmental preparation and healthcare development (in which we fare poorly), the financial markets can’t and won’t price in such an eventuality every year.

It also means that your investment portfolio is likely to be fragile unless you take the effort to avoid being caught with the herd and the eventual stampede that ensues.

That the broad equity market was overstretched going in to 2020 is something most will agree on. But, being brave and reducing the allocation to riskier assets is something that most of us wouldn’t have done. Only because we continue to be driven by the fear of missing out – the fear that everyone around us might participate in a market rally and make more money than us! The game of investing is psychological and it’s being played out in your mind even as you read this. When the market falls by 13 per cent in a single day, you shudder to think as to what would come next. But when it recovers by that same margin over the next few days, you also wish that you hadn’t waited and invested it all instead.

Everywhere, I see investment professionals saying that this is a great time to invest into equities and that it is a once-in-a-decade opportunity. Now, this sounds good in theory; but, unless you’ve been holding on to cash or safer assets (because you took an active decision to not follow the herd), there isn’t much surplus to invest. And if your investments in safer assets are linked to short-term goals, you should not be re-allocating these towards equity even if this is a ‘once-in-a-decade opportunity.’ Also, we are now worried about our jobs and incomes and whether we have enough stashed away in case of such eventualities. So, where are the funds to invest going to come from? Also, how are you psychologically going to deal with a further market crash from here?

These questions are often overlooked. And if you’re tempted by stories of how investing during the 2008 crash created multi-millionaires, remember that if you had invested all your money on 18th March ’08 after the Sensex fell close to 30 per cent from its peak, you would’ve doubled it in six years (which is a 12 per cent compounded return) and almost tripled it in 11 years (9.5 per cent compounded return). If you wonder why it didn’t grow more, it’s because the Sensex in 2008 fell by over 50 per cent. So even though you participated after the initial correction of 30 per cent, the returns didn’t create the riches that you dreamt about.

Creating a life without financial hurdles is hard and we believe that the assumptions we make in our plans will fall into place. But then, there are emergencies we don’t see coming.