5 Tips to Shield Your Investments Amidst Russia-Ukraine War

After the swift rally seen in the last 18 months, the margin of safety appears to be narrow, and the direction of the equity markets from the current elevated levels is uncertain. Given these geopolitical tensions, the market corrections have been stiffer over the past few weeks. Since the war broke out between Russia and Ukraine, Indian investors have been in a panic mode. It's simply a reminder that volatility is an essential part of investing, don't allow your emotions to become your portfolio's worst enemy during times of high volatility and tension.

It's no secret that market uncertainty leads to volatility and that panic due to volatility leads to fear-based portfolio decisions, such as the enormous sell-off we saw in March 2020, owing to COVID-19 uncertainties. While geopolitical events such as the escalating tensions between Russia and Ukraine have an impact on financial markets in the immediate wake, they rarely have a long-term effect.

Given that the markets may go through periodic turbulence caused by various factors, earlier it was the pandemic, and currently, it's the war. As testing the time may be, investors need to avoid panic and no need to book losses to make a hurried liquidation of investments. It's best to stay put and analyse the situation and act accordingly. You may have short-term losses with the ongoing turbulence. But it would help if you did not allow this to impact your long-term financial planning and your investment goals.

The markets have seen it all in the past in various phases, including recessions, pandemics, wars, and political upheavals, in various stages. It has always recovered and paid up to those who had stayed invested. As an investor, you would be anxious to insulate your investment portfolio during the decline. Here are some key points to remember in order to protect your investments amid the Russia-Ukraine conflict.

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1. Re-define Your Financial Goals

The primary step is to start reviewing your financial goals, which you had set earlier, as you need to ensure that your financial goals remain in accordance with your investment portfolio. And there is a chance that few investments might be underperforming due to the prevailing market conditions. Your financial goals will serve as a compass to guide you through uncertain times; it will help you in deciding whether to hold or switch your investments.

For instance, if you have an ongoing five-year SIP and something unexpected happens after three years, like the recent war crisis. In that case, you still have two years to wait for your investment to grow or recover from the losses. Once you review your financial goals it will help you understand the changes you need to make with your investments to successfully align with your envisioned financial goals.

2. Analyze Your Portfolio Performance

The equity markets may nosedive in reaction to a global crisis, this process of reviewing your holdings and analysing their performance will assist you in identifying schemes or asset classes that are not performing well or have been exposing you to undue risk. The investments in your portfolio might be appropriate as per the set asset allocation plan but are unsuitable in the current market conditions and therefore exhibit a decline in your portfolio performance.

Keep in mind that if your portfolio is underperforming when market sentiment turns sour, then you should not panic and make changes. Investors must not rush into switching their portfolio without thinking it through and give knee-jerk reactions to volatility. Amidst crisis, social and political tensions will impact the market, you should ensure to make informed decisions. You need to analyze various quantitative and qualitative parameters to uncover any consistent underperformers in your portfolio. A thorough review of your portfolio performance will help you understand the investment decisions you need to make.

3. Avoid Hasty Decisions

Considering the panic amongst investors, it is advisable to avoid hasty liquidation of the investments in a volatile market. It would help if you analyse your investment portfolio and not simply follow the herd mentality. Always make it a point to manage your investments in congruence with your needs, rather than in an ad hoc manner or copying what your friends/relatives/colleagues/neighbours do with their investments.

Your decision may soon turn to regret once the markets bounce back. For instance, many investors liquidated their equity mutual funds and discontinued their systematic investment plans (SIP). As per historical data, if investors had continued their SIPs- despite the initial COVID-19 market crash in March 2020 and continued further, they would have benefited more during the market rally as opposed to those who withdrew in panic, prematurely.

More specifically, a short decline should not be the only reason you discontinue or liquidate your investments when markets turn volatile. There need to be more compelling reasons for the liquidation, such as achieving an investment goal or avoiding any undue risk that affects your portfolio. You switch your investments if you identify any consistent underperformers. If there are no other compelling reasons, stay put with your investments; a recovery may soon follow. Ideally, you may not panic and continue the investments in a manner you aim to achieve your goals.

4. Diversification Is the Key

Diversification of a portfolio is the key to tiding tough times. It is a good idea to diversify your investments into various asset classes to offset risks from any one class. Diversification is not only about investing in various asset classes but also allocating adequate amount of funds in different types of securities in each asset class. You must ensure proper diversification with the existing investments and if any additional investments you wish to make.

Basis your financial goals, you can allocate a portion of your assets to options such as provident fund, real estate, gold, or bonds, or even a bank deposit. The right mix of investments, created as per your investment objectives, will keep you afloat in any economic weather. Diversification will help you reduce risk in your portfolio while still generating decent returns in a volatile market.

Looking at the current environment, a well-diversified portfolio is currently your best shot for surviving a war, crisis, or pandemic. To that aim, certain equity and debt investments present appealing opportunities when viewed from a medium to long-term standpoint.

5. Do Not Time the Market

Timing the market amid a crisis or a pandemic is not a good idea. Make no modifications to your investment without first assessing market circumstances and your investing suitability. For example, in 2020, which was a tumultuous year in which the benchmark took several turns at various points. It is impossible to forecast when the next market rise or fall will occur. When crisis loom large, the markets tend to take a roller-coaster ride thus, trying to time the market at such times is not a prudent strategy.

Any investor's wise course of action to protect their investments against unfavourable market scenarios is to hold on to their investments and not panic. Do not make any changes to your investments unless you identify any undue risk or underperformers considering various qualitative and quantitative parameters.

Given that, it is only achievable if you are financially literate and have the necessary financial knowledge to comprehend the above-mentioned investment protection measures. Financial education enables you to be aware of a variety of financial difficulties arising from recent market events that may affect the performance of your investments.

Financial literacy has for a long time been associated with managing one's finances, saving regularly, investing wisely, and avoiding poor financial decisions. Financial knowledge will offer you an advantage in being financially aware and assisting you in making informed investment decisions, which is critical in these challenging circumstances.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst