With benchmark indices sliding daily your equity investment values are going to look dismal. Seeing the low growth or rather pure drawdown can cause a lot of anxiety. While equity risk is very high in the short term, it is also the most viable form of investment to create wealth in the long term. Hence, instead of feeling sorry about your investment returns today, focus on these three things which can impact your future financial outcome.
1. How much risk can you handle
If you are feeling too overwhelmed in this correction and unable to manage the level of falling returns, perhaps your risk-taking threshold needs to be revised and you need to lower your allocation to equity.
Moreover, if this correction has wiped out your savings leaving you struggling to achieve your near-term goals, then also you need to reassess your allocation to equity. Take this time to make conscious decisions about your ability to absorb equity risk and your goal time horizon. A lower ability to manage equity risk means having a lower allocation to equity with the outcome of increasing the time horizon of your goal or having a more reasonable financial objective for goals.
If this correction has not changed your life today, it means your ability to absorb risk is high (or your asset allocation is robust) and you should continue as it is.
But rather than reacting, simply reassess your risk-taking ability now.
Saving more should be the first call of the day. Save and invest this for the future. To save more you have to start spending less on things that you don’t really need.
2. A lesson in saving
The market correction and the fall in business sentiment show that the global economy is fragile and this means your own cashflows either from jobs or business income might suffer. Saving more should be the first call of the day. Save and invest this for the future. To save more you have to start spending less on things that you don’t really need. Preserve capital in your cash flow, especially in times where your investment capital is also not firing.
3. The goal is your hero
If you haven’t marked out your financial objectives and goals yet, then do it now. Goal planning can help you save a lot of heartache in times like this. If you have a goal with a defined timeline, your actions will move accordingly.
Ideally, withdraw from market risk exposed assets at least two years before your goal needs to be achieved, thus preserving capital for when you need it the most. Moreover, defining the goal helps you define the asset allocation as well. For high priority goals which are not too far away, the level of equity exposure will not be too high either. This will bring balance to the outcome rather than shock even in extraordinary market conditions.
Panic in times like this will lead to irreversible actions. It’s better to focus on what you can change to bring about positive outcomes in your future financial life rather than focusing on immediate action when the external environment is in a state of extreme stress.