The year 2020 has been a roller coaster ride for the market. In January the market has seen the all-time high of 42,273, then reduced by 40% in just two months and recovered 20% from the bottom in a little more than a fortnight. The COVID-19 pandemic has lead most of the people to reconsider their investment decisions and financial priorities. Often such situations make investors clueless and confused about what steps to take further to prevent loss of their money.
It’s quite a natural tendency for investors to collect information from various sources, especially during uncertain situations. But it is to be made sure that more importance is given to the weight of the information than strength. Well most of them do the other way around. The problem with giving more importance to strength is they would end up in wrong decisions from the confidence they earned from the information. Investors should focus on medium-term prospectus rather than short term. It’s common for investors to have myopic loss aversion, even if they have planned for long term investment they would get hurt by the short term loss. Since its difficult to predict short term market, this loss aversion can adversely affect their overall returns.
Diversification is the best way to navigate through the risk. If your portfolio is diversified with a variety of instruments, it is less likely for all your investments to perform badly. Diversification if done right reduces the overall risk portfolio. Risk of the diversified portfolio will be less compared to the combined risk of individual securities. During asset allocation and diversification in uncertain times like the current situation, investors must maintain discipline. Diversify your portfolio by investing in several asset classes. The combination of fixed-income investments and equities within a portfolio gives smoother returns as they have different return and risk characteristics.
To have quality investments in the portfolio is your biggest asset. The vitality of quality investments is visible this year. People who invested in companies that were backed by quality management faced lower drawdowns from the market crash.
Quality investments supported investors from drowning when the world was struggling to position itself from the uncertain environment. These investments with lower beta value grew at a slower pace. Quality investments are comparatively stable, hence they gave better experience to the investors in terms of net returns from the stocks.
To make better investment decisions, its best to evaluate the strength and weight of the information, check how the new information and its source has changed your initial perception. it’s necessary to evaluate the past market cycles even though the current situation can be different from the past, make appropriate changes to your decision according to the new information and circumstances.
