The pandemic reiterates that risks cannot be timed or avoided. However, Prashant Jain, ED and CIO, HDFC MF believes that they can be managed through asset allocation. Addressing the audience at Cafemutual Confluence Investment Marathon 2021, he shared with us key financial lessons that the pandemic has taught him.
Though investment risk cannot be avoided, it can be better dealt with through asset allocation. Asset allocation should be a function of emotional and financial tolerance for volatility. Investors should identify that portion of their wealth which they can spare for long period, on which they can bear volatility before deciding to make investments in unpredictable/riskier assets. Investing within risk-taking capacity at least saves investors from selling in down markets.
While investing in equity, investors should focus on sustainability, strength, comparable advantage of business and its value. Strong businesses are the least impacted in difficult operating environment and reasonably valued businesses do not cause permanent damage to wealth. Over time, such businesses outperform bonds significantly despite difficult events like the pandemic.
Over the last three decades, there have been certain events every 5-10 years which has led to a sharp correction in the market. Last year, the world panicked owing to the pandemic and the majority of the investors did not think long term and they did not focus on value. This is why many did not invest in equity and those already invested reduced their exposure. Interestingly, it is often said, most of the returns are made in 10% of days of the total investment horizon.
As Warren Buffet says, be fearful when others are greedy, and be greedy when others are fearful, in testing times like the current pandemic, the focus must be on the long term impact and the expected growth and value.
Prashant advised moving away from the daily count of covid cases and related headlines to have a more balanced and confident approach in such situations.
Watch this video to hear Prashant’s wise advice.
