The year 2020 has been a roller-coaster ride - there’s no denying that. While it may have gotten off to a good start, March 2020 saw the beginning of the effects of the pandemic, which has now come to mark the year gone by. Right from the early set of lockdowns to the unexpected market crashes, 2020 was a year that taught investors across the board a new lesson or two. In the wake of the new year, as we witness the economy heading back on to the path of recovery, it’s a good time to revisit the personal finance solutions and the investment advice we’ve always relied on till 2020.
Have the fundamentals of investing changed? And going forward, what should investors look at before constituting their investment portfolios? Let’s check out the details of how the COVID-19 pandemic has impacted personal finance and investing.
Do the fundamentals of investing remain the same?
The short answer to this would be - yes. The fundamentals of investing, particularly long-term investing, continue to remain unchanged. The pandemic may have been the black swan event of this decade, but it’s certainly not the only time the markets have dipped. In the decade before this, we had the financial crisis of 2008, where the international financial markets were greatly affected negatively. As is always the case, the markets bounced back.
And now, as we segue into 2021, thick in the time of another market recovery, we need to keep in mind that despite occasional bends in the road like the earlier financial crisis and the more recent pandemic, the fundamentals of investing, particularly at the level of personal finance, will continue to be more or less the same.
So, what should investors keep in mind while constituting their investment portfolio in the post-COVID world?
If you’re looking to reconstitute your investment portfolio or even to switch it up a bit this new year, here are some details of the fundamentals that you need to keep in mind.
1. Asset allocation remains important
It may be natural for investors to gravitate towards any particular class of assets, given the market’s behavior in 2020. The more conservative investors may further inch closer to limiting their investment portfolio to fixed income instruments, while the more risk-friendly investors may increase their exposure to equity, seeing as how the market bounced back. However, both these strategies may eventually lead to suboptimal asset allocation. The central idea for constituting an investment portfolio continues to remain the same - diversify your portfolio just enough, and ensure that your assets are aligned with your short-term and long-term goals and your risk profile.
2. Value investing continues to remain a good strategy for the long term
The market crashed significantly in the early months of 2020, and for investors who swear by value investing, this was a golden opportunity to buy shares at prices less than their intrinsic value. However, now that the major effects of the pandemic have passed, you may find it increasingly tempting to buy blue chip stocks, even if they may be overvalued. If you’re investing for the long term, however, bear in mind that value investing continues to remain a good investment strategy. Fundamental analysis can help you identify undervalued stocks. If you’re a beginner keen on value investing, you could also seek professional help from an expert.
SIPs were no doubt growing in relevance before the outbreak of the coronavirus and the resulting market crash. However, now that we’re edging back on to the path of recovery, they continue to be more relevant than ever. This is particularly true for people who are still grappling with a cash crunch due to layoffs or pay cuts. It’s also helpful if you’re trying to save up but also don’t want to put your investments on hold. With SIPs, you can choose to invest as low as Rs. 100 a month in the mutual funds of your choice. This gives you the freedom to continue investing without the burden of having to put together a lump sum amount to invest.
4. ESG investing is picking up pace
In addition to the essentials that were relevant pre-COVID, ESG investing is growing increasingly popular. This effectively reflects the fact that investors are growing increasingly conscious of where they invest their money. Aside from the regular fundamentals, many institutional as well as retail investors are also evaluating how the companies behind the assets they choose fare on the environmental, social and governance scale. People are choosing to put their money in the stocks of companies that emerge as environmentally and socially conscious and abide by governance-related regulations.
Conclusion
New parameters like ESG criteria may have entered the picture, but for the most part, the fundamentals remain unaltered. If you’re evaluating a stock, a fund or any other asset or security in the markets after the year we had, it helps to keep the above pointers in mind. In case you’re wary of making decisions for your investment portfolio, you could always seek for professional assistance like Tata Capital Wealth.
11 February 2021
5 mins read
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