Let me start with using a much touted phrase – we are undergoing and witnessing unprecedentedly dark times. A time which has all the elements to cause anxiety to the strongest amongst us. Be it about being cooped up indoors, fewer distractions, no social contact, fear of mortality or uncertainty about when life can resume to the normal that we are now used to. In all of this, one of the elements which I aim to address today is financial anxiety.
What are the potential reasons for financial anxiety?
Oxford dictionary defines anxiety as “a feeling of worry, nervousness, or unease about something with an uncertain outcome”. Under today’s circumstance, a lot of that uncertainty stems from worries about money. Some such worries are:
1. Worry of recession and impact on livelihood
We are all aware that with prolonged lock down in most parts of the world, the economic output and growth is most definitely going to drop. We might as well be prepared for a scenario where people only gradually start coming out, and over time things resume their gradual pace. In the process, some businesses might see a lack of demand and they might even have to make cutbacks. However, even in the case of short term pain, we need to know that humans as a race have generally triumphed over any tragedies, even the much longer haul ones. We need to remind ourselves, that this is a battle which will not turn into a long drawn war. If there is pain, it may be in the short term but gradually things will get back to normal.
2. Value of invested portfolio
This is an easy one. Most of the market action today is being dictated by fear and uncertainty. Most players in the market recognise that we are in for an uphill task and prefer to keep money in safer havens like cash deposits rather than equities or even debt assets. However, history shows us that in financial markets, as fast as the drop is, once the underlying reason is addressed, the spike is as sharp. We have seen this in the case of the SARS scare (yes, this is a more intense crisis), Swine flu, demonetisation and even the sub prime crisis of 2008. Here is a chart to enumerate just that:
3. Financial implications in case of contracting coronavirus
Sure, the fear about contracting Corona virus and what it might entail is a very real fear causing many of us quite a bit of anxiety. That is where prudent risk management comes into play, through timely and adequate life and health insurance. Recently, IRDA gave a directive for active mediclaim policies. Health insurance providers now need to cover coronavirus quarantine and hospitalisation expenses as part of regular hospitalisation covers.
5 ways to rein in your financial anxiety
Financial anxiety is a real thing and it can often snowball into major stress triggering off even more health concerns that we can all do without. However, there are a few measures you can take to put your mind at ease:
1. Check up on your emergency fund
As mentioned in a prior article for a 3 step financial plan, an emergency fund is one of the key measures to doing your financial planning right. This situation, if anything brings that necessity at the forefront. This is a good time to take stock of your fixed monthly expenses as a household and ensure that atleast 6 months worth are saved up in a safe financial instrument. In fact, if you have any concerns on future cash flows, take it up a notch and build a cushion for 12 months worth of fixed expenses. This is a good rule for small businesses as well. Most of them will take a hit while having to make fixed expenses like employee salaries. Keep enough cash in hand for six weak months to not suffer any sleepless nights at such times.
2. Cover your health risk
If you do not have a health insurance and neither is your employer covering you for corona virus, then check some of the specific fairly priced insurance policies that some providers have now introduced. For instance, Digit was one of the first few providers to come out with a coronavirus coverage. The best part is that it is completely digital making it easy enough to buy even under lockdown. However, it is valid only if you have not had any respiratory issues for the last four weeks and with a waiting period of 15 days. Also, in case of financial dependents, use this time of fear to make a prudent decision of getting a term life insurance.
3. Link your investments to specific goals
The problem with most investors is that we just add money to funds without really thinking of what, why or when. To this end, goal based investing is really the best way to go about investing. Not only will it align you to the long term when it comes to equities, it gives a method to the madness. After all, if you don’t have a target, how do you know if you even hit bull’s eye? Situations like this force us to face up our fears and often end up in us looking at the immediate future. However, it is only with tagging your investments to financial goals that you can safeguard yourself from doing so.
4. Do not look at your existing portfolio
A lot of advice today focusses on this being the right time to rebalance your portfolio. However, if you look at the value of your investments today even to rebalance, depending on when you have invested, all you might see are big red drops in value. While we try to kid ourselves that we are rational creatures, most often emotions rule the roost and you could end up making decisions or clicking buttons that you end up regretting. So, for the time being, just hold on and do not look at the value of your existing portfolio. There is a good reason why ostriches have survived for millennia and not looking at bad news can help us survive better too.
5. Invert the fear
Mind you, this suggestion comes with a lot of ifs and buts and terms and conditions. On 13th of this month was the first time I experienced being a part of the financial services industry on a day that the market had to impose a lower circuit breaker. I was at one of our branches, and some colleagues were excitedly talking about how so many great quality stocks were trading at such low prices. Of course, I also got excited. This was my Warren Buffet moment to buy when everyone was fearful and I initiated a few trades. But, finally, I had to stop looking at the markets every day because instead of feeling disappointed in my existing portfolio value I could very well tip on to the other side. I was in danger of over indulging and using money I should keep safe just to take advantage of what a lot of market pundits are calling an opportunity of a decade. Suffice it to say, if you have stable future cash flows, buffered up emergency fund, a long pitless time horizon and a pocket marked amount of money to invest, then and then alone invert the fear to see this period as an opportunity. Buy some strong company stocks or ideally some well-proven good mutual funds. There again, make a decision on the funds and then deploy the money in tranches through STP or Systematic Transfer plan over the next few months to have a higher probability of good, low average purchase prices.
This is one of those times where we can either wilt under the pressure or come out stronger than we were going in. Let’s all strive towards the latter. Are there any other reasons giving you financial anxiety? Let me know in the comments below and we can try and resolve them together.