Covid-19 induced market collapse and its rebound: Swift investment move in crisis times can yield rich dividends

In the 18th century, Baron Rothschild of the Rothschild banking family made a profound observation: “The time to buy is when there’s blood in the streets.” The Covid-19 pandemic, that ravaged markets worldwide last year, presented one such golden opportunity to investors.

If someone were to predict on March 24, 2020 when the BSE Sensex had nosedived to 25,683 from over 41,000 in January that the index would more than double within a year, you probably would have laughed it off. The Sensex touched its lifetime high of 52,516.76 on February 16, 2021.

The NSE Nifty-50, too, more than doubled from its March 24, 2020 low of 7511 to 15,431 on February 16, 2021. Both indices have retraced a bit since then.

Were you one of those nimble-footed equity investors who bought stocks when the market was seeing ‘blood in the streets’? The Covid-19 induced collapse in the stock market provides a lesson in hindsight for those who stayed away or pulled out and thus could not make the most of volatility.

If you are tracking stock markets and the bellwether indices you would have noticed that the Nifty gained 14.9% returns in CY2020. But if you had invested in the Nifty at its bottom of 7511 on March 24, 2020, you would have made a cool 83% by the end of CY2020! Hidden behind the index are individual stocks that have rallied multiple times from their March 2020 lows. A basket of such multibaggers would have made your portfolio look as healthy as never before.

As we are about to close the financial year 2020-2021, there is a talk of volatility coming back with bond yields inching up worldwide. Rising commodity prices are also a threat for net importing countries like India. If there is volatility you should use it to your advantage to build wealth.

Here are a few things you should consider before taking exposure in the capital market:

Asset allocation: It is like a compass for a traveller in a desert. Devise one for yourself by deciding on how much you can invest in equities, bonds and gold after factoring in your financial goals and risk appetite. It helps you stay on course when the volatility comes. It stops you from investing more in a rising asset class after a point. And it stops you from pulling out of an asset class just because it has done poorly in the recent past. If you keep adding to your investments based on the stated asset allocation, you keep accumulating more investments ignoring short term movements.

Asset rebalancing: Asset allocation is of no use, if you do not rebalance it from time to time. Changing asset prices ensure that the actual asset allocation of your investment portfolio deviates from your originally intended asset allocation. This should act as a trigger to rebalance your asset allocation and this should be done at least once a year. This means you sell an asset class that has done well, and you buy an asset class that has not done well.

Static asset-allocation solutions: Investors can look at mutual funds that offer to allocate to various predetermined asset allocations and keep rebalancing from time to time. You may want to start an SIP in such schemes and benefit from them over long term.

Be a long distance runner: The last 12 months have proved that patience and the ability to stay invested in the market are key attributes for a successful equity investor. It has also shown how markets can rebound within a short span of time and those with the ability to bear the shocks will eventually end up making money. Hence, risk-taking ability is crucial for investing and stock markets are not for the faint-hearted. You need to be a long term player to create wealth.

Take expert help: If you do not understand markets or are unable to track them regularly, you should take the help of a wealth manager, financial planner or investment advisor. Investing without knowledge can burn a big hole in your pocket. The expert will help you take advantage of market volatility.

Big money is made when you take volatility in your stride and invest, and not avoid it. If you run away from the market during volatile times and wait for a stable, certain, growth oriented economic environment to invest, then the portfolio returns could be muted. Investing in stable times typically happens at far higher prices, thereby offering mediocre future returns.