Posted in Investing, Personal finance, Savings

Locked down – 5 hurdles to overcome

In the last few weeks the world has changed quite a lot. With no sight to an end to the corona-virus spread, cities after cities are going into lock down and people are forced to stay at home.

This will impact the economy in a very bad way and many businesses like entertainment, travel and food will be severely affected or shut down. In these unprecedented times, the current situation of the stock market and its decline is understandable.

Since this blog is concerned with personal finances, let us look at the impact this black swan event can have and how to get over this crisis.

We will examine 5 adverse scenarios and how my previous posts (in good times)  suggested recession proof way of managing personal finance.

Social distancing

This has been enforced in many cities and people are not allowed to be meet each other face to face.

    • This will impact people and their livelihood when it depends on teams and network. For example, direct real estate investing like house flipping, buying houses, wholesale deals and likes.
    • Financial, insurance advisors and their clients who depended on face to face interactive sessions. While this can still be done over video conferencing and online communication, the personal coaching sessions may be less personal after all now.
    • Investments which depended on a broker or branch are impacted since  offices are shut down or low on staff.

The key to solving these issues is to setup systems that enables you to transact virtually from anywhere in the world, including your home. If you have automated your financial systems using FinTech, those systems are not affected by the current situation.

FinTech – can you be immune to it?

Losing jobs or income

    • As various industries are expected to be hit hard by this event, many people may lose their jobs or get a reduced income for an unknown period in the future.
    • This will cause difficulty in managing household cash flows, paying bills, mortgage and tiding over emergency situations.
    • Emergency medical conditions, for example, someone in the household may contract the virus and need to be hospitalized. Even with insurance, it may cause a hefty out of pocket expenditure.

The key to solving such emergency situations is to have enough cash cushion in terms of Emergency Fund and to cover Short Term Obligations.

One essential comfort zone

Investments are tumbling and losing their value

    • Your stomach will have a strange feeling when you look at your stock, ETF or mutual fund portfolios under 401k and Taxable accounts.
    • Almost all portfolios are beaten down 25-30% and may go further down to 50% or more.
    • With the risk of financial institutions and other companies going out of business, even fixed income portfolio is not safe. There may be large scale defaults in the bond market, as companies struggle to meet their short term debt obligations.

The key to solving such challenges is to remain invested and not panic sell out of it at this time.

Afraid of investing? Not so simple either

Fear is gripping us

    • While there had been virus spread earlier, the scale of the COVID-19 is unprecedented and growing.
    • This type of lock down has never happened before, and after what happened in Italy and China, we are gripped in a fear of the fatality rate caused by the virus.
    • This has stopped us from behaving rationally and with our investments, people may be reacting with the same fear. I have read many discussions on Quora where people are predicting a long recession and advising others to pull out investments or completely stop investing more.
    • Fear is the worst enemy and negativity is biggest killer of future prospects.

The key is to remain calm and take necessary precautions (staying at home, frequently washing your hands etc.). Similarly for finances, do not take up unnecessary debt at this point but just remain invested and keep your monthly investments ongoing.

The biggest enemy of your investments

Not building new assets

    • While there may be a recession ahead, this may be the starting of a good time to buy assets.
    • Our net worth is beaten down due to the stock market crash, and this is not the time to rue over the loss.

Instead we should focus on increasing the underlying asset values and look to the future for those assets to throw in cash flow and appreciate.

The Net worth vs. Cash flow debate

Conclusion

At the end, we all have to realize that the world will tide over this crisis.

For our finances, we just have to carry on doing what matters and take a long term view.

If you adopt the SAFE plan as in below post, nothing should really change.

The SAFE plan – Simple, Automated, Flexible and Efficient

With the forced shutdown, learn a new skill indoors and do not worry about your investments.

acoustic adult close up fun
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