Embrace the Bear – Part 2

Amar Pandit , CFA , CFP

You should start with Embrace the Bear posted on 13th March, 2020.

As I had written in the “Embrace the Bear” (repeating this phrase again so you memorize it), the markets will continue to be volatile. We are seeing a drop of 11-12% today (not an easy one to digest)… Am I worried? No and Yes.

I am not worried about the markets as these are once in 7-10 years opportunities that come by. So even if the markets were to correct by another 20%, I would still be fine at a personal level because the markets WILL GO UP again. Yes, no one knows when, but they certainly will. Wise people will thus continue to buy through this fall. However, I am worried about the physical and mental (worry about safety) health of people.

The previous financial crash of 2008-2009 was caused by the excesses in the Global Financial System and banks globally had to be bailed out. This contagion had impacted economies and stock markets around the world including India. This time it is actually the other way round where banks in the US (especially Bank of America, J.P.Morgan Chase, Citibank and so on) flush with capital are hoping to serve as a buffer for the hardships to hit millions of customers and businesses. This confidence comes from the Stress test that all 18 of the largest US financial institutions passed last year in which they withstood a hypothetical recession in which the stock markets fell 50%, GDP fell 8% and unemployment at 10%. Even in 2001, it was the Technology bubble that burst.

However, this time, it’s a Black Swan event (an event that is unexpected and unknowable). The impact is not just on the Financial Markets but also on the Physical & Mental health of people. People are worried and thus our Amygdala (the centre for emotions, and emotional behaviour in our brains) is super active. It tells us to Run to Safety… Thus you need to take a deep breath, do some meditation and ask yourself “Why Do I need to Run?” You should read the book “Thinking Fast and Slow” (Daniel Kahneman- known as the father of Behavioural Finance), an excellent book that basically tells us that we have 2 Systems of Thinking.

System 1 is the first responder and operates automatically (Like if you saw a Tiger… No time to think right). It’s called the Reflexive System and its role is to act on feelings. System 2 is our Thinking Brain also known as the Reflective one. This is where you think about the future, plan and exercise self–control. This is the time for your System 2 to be Active in Full Speed. Let your System 1 (which does most of the lifting in our day to day life) TAKE a BREAK as far as your investments and money are concerned…

No one knows how much the markets will go down or will turnaround should Coronavirus gets contained worldwide in the next 2 weeks (We all are praying for that but life has to go on irrespective of whatever). Yes, the markets can go down another 20% which means we could see a 18000-19000 levels on the Sensex. Should that scare you? Absolutely not…

Ask yourself the following questions:

  1. Is the world going to end? (In that case, you really have nothing to worry. Make this time the Happiest part of your life…). The probability of this happening is 0.00000000001%.
  2. Is the world economy and markets permanently doomed? (Even in this case you have nothing to worry because there is nothing you can do about it). Sure a lot of businesses and industries will have to be bailed out and the pain will be real but the economy and markets will bounce back once Coronavirus is under control (This virus will exist permanently like many other viruses and will be a part of our lives even in the future…). The probability of the world economy and thus markets being doomed permanently is also 0.00000000001% (Yes even this one has 10 Zeros I promise).
  3. Will Things get back to Normal? Yes, lives will be lost (and that pain cannot be healed and will take time) but things will get back to normal Sooner than Later. The power of the human race has made the impossible possible through several ages and we are now talking about Space Travel (instead of still living in Caves). The probability of things getting back to normal are 99.99999999999%.

I have recapped the key action points below for those of you who have not read “Embrace the Bear.”

Here is what you should be doing and enjoy this financial roller coaster ride:

  1. Ensure that you have 6 months of liquidity in Liquid Funds that you can use for any emergency. If you are running a business, you might want to re-look at this and plan for additional liquidity. If you feel more secure with a 12-month liquidity go for it.
  2. Continue with your SIPs and if possible, increase your SIPs. If you haven’t started yet, Just Do It.
  3. If you have any surplus assets, after keeping sufficient liquidity, invest additional amounts through STP (Systematic Transfer Plan) over the next 12 weeks or on every sell off like we witnessed today (23rd March 2020) of 4000 points on the Sensex.
  4. If you have debt funds, this is the time to sell high (debt funds) and buy Low (into Equity Funds through STP). Yes, you need to check about exit loads and tax impact (which we will guide you on) but an exit load of 1% is not a big cost to pay in such times when the markets have corrected by 30% plus… These are uncertain times, but this will be over at some point and things will return back to normal. People always say I wish I had bought when the markets were low, and I am sure a lot of people will have this regret in the next few years.
  5. Utilize tax-loss harvesting as a strategy booking out short term capital losses from some existing investments and re-entering these same investments… You can set off the losses against any capital gains in the current financial year or carry it for the next 8 years. (I had written this 10 days ago, so you now need to be really careful about this one as the markets have corrected 6000 points in the last 10 days… Do this part if at all under the supervision of someone who understands this and is a professional advisor.)
  6. Write to me if you have any questions.

Read this 1-minute Nano Learning “The Third Type of Investor.

This is the time to be that “Third Type of Investor”.

Till then, please be safe and take care of your health, your family’s health, peace of mind and Live HappyRich.