The virus has returned with a vengeance, but this is not the time to stop your mutual fund SIPs

It’s like a bad dream that has surfaced the second night running, only worse. A year down the line, the pandemic is having its worst moment and a whole lot of people are panicking about everything that sustains them. Worries about health and wellbeing are immediate but as businesses and professions start looking shaky, worries about money, savings and investments are also coming to surface. People know instinctively that a crisis that lasts for two years is not twice as bad for businesses and their incomes as one that lasts for one year—it could be exponentially worse. Those who barely made it through last year’s slowdown could just be tipped over the edge now.
Once again—and quite suddenly, obviously—I’m hearing from people who are again worrying intensely about their investments. Nothing that serious has happened to equity values yet, especially given the scale of the surrounding health crisis, and yet the worry is entirely justifiable. So what should be done? As I’ve written earlier in the crisis, and many times in the years past as well, a savings and investments approach that has to be adjusted for good times or bad is not of much use because we never know when the times turn.

And yet the temptation and the psychological need to act can overwhelm us. If you feel like that, it’s best to just think back to last year. The right thing to do is still the same as it was last year, and will be next year when the crisis lies in the past. At that time, I had given the example of my favourite financial gurus to emphasise the need to be circumspect against any hasty action. In an interview with the Wall Street Journal, the 96-year old Charlie Munger had revealed that Berkshire Hathway was not looking at any investments. With one of the largest holdings of cash in the world and assets going cheap, Warren Buffett and Munger were sitting on their hands. Munger made it clear it was because he did not understand the situation and therefore, would like to ride it out. As he said, “Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”

That’s still true. The best course is to not change course at all. The question to ask is, do you have any evidence that the change you are going to make will be better than the current course? Unless you have any evidence, then it does not make any sense. Why? Here’s the most important thing: the likelihood of overreaction is higher than that of stumbling upon some course of action that may prove to be better than the current one.
However, this does not mean that you must, for example, stop any well-chosen equity SIPs that you are running. Not acting means to let the SIP run and continue investing. The reason long running SIPs are a special case is that it is precisely in such times that SIPs set you up for future gains. The entire logic of SIPs is that when equity prices are down and out and NAVs are low, then the fixed monthly amount will get you a lot more units. When prices eventually recover, then that is what will get you a lot more units. When prices eventually recover, then that is what will get you outsized gains. Stopping SIPs when markets crash gets you the exact opposite of that. Obviously, not the right thing to do.
There’s a second part to this I will discuss in these pages next week, but the most important thing is that nothing of what I’m saying is a reaction to what is happening. These are general principles and we must stick to them no matter how bad things get. Otherwise, what’s the point of having principles?

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