We may encounter certain years that are notable for geopolitical turmoil and the ensuing broad economic chaos, or inflation and the consequent interest rate rises, or layoffs resulting in a significant downturn, or all of these factors culminating in some financial system failures.
The following are a few crucial financial lessons to remember when we experience various such distress events in our life or in the economy as a whole:
1. Avoid unregulated investments:
With its exceptional profits, cryptocurrency has become extremely appealing to younger investors. Nonetheless, it was a dangerous investment because it was unregulated. The dramatic drop in its value in 2022 shocked cryptocurrency investors.
The cryptocurrency crash teaches us an important financial lesson: “everything that glitters is not gold.” In this instance, I would strongly insist you to read through another article written by me here, wherein we see which assets is a better investment, gold or crypto? (Nevertheless, there is no bias towards gold asset class in this article, and I have articulated in detail on the pros and cons of both the asset class. Have a read through it!)
Now, coming back to our current topic, it is usually best to put your money in assets that you understand well. While selecting investment products, consider your risk tolerance and financial objectives.
2. Always aim for the long term in equity market:
At times of crisis and uncertainty, the stock market may see some of its biggest falls. Several investors may sell their shares as a result of increased uncertainty caused by global upheaval and unfavourable market commentary. Yet we must remember that after this moment of instability passes, equities make a powerful comeback, propelling the markets well over their prior highs. As a result, investors who stayed committed despite the turbulence are always the winners. The essential takeaway here is that market volatility are an excellent chance to grow your investment; the longer you remain, the greater the payoff.
3. If the inflation is rising, you need to invest your money such that your purchasing power is increasing in line or more than the inflation:
Inflationary pressures may wreak havoc on many people’ finances. Food, medications, clothes, transport, education, and utilities may suffer considerable price increases as a result of rising inflation. This circumstance teaches an important lesson: when inflation rises, investing is the greatest way to retain or enhance buying power. Examine your investment holdings and reallocate funds to appropriate growth-oriented assets. Don’t count only on your savings to get you through, as savings rates offered by our banks are substantially lower when compared to inflation rates, especially when the economy is experiencing high inflation.
4. When interest rates rise, it’s better to prepay your loans:
Key interest rates have recently hiked dramatically by central banks all around the world. EMIs may rise as a result of interest rate increases, making loans significantly more costly. Rate rises keep imposing a strain on both prospective and current borrowers’ monthly finances. This scenario is a strong argument in favour of prepayments and how they may keep you afloat during the rate-tightening phase. It can assist you reduce your loan duration while also lowering your interest payments.
5. Rising FD rates:
Loans will undoubtedly become more expensive as repo rates rise. Deposit rates, on the other hand, climb, but not in lockstep with the repo rate hike. Hence, conservative investors might benefit from the rising rates by lading their FDs to get better returns.
6. Fear of layoff – Always have an emergency fund:
Fears of a recession may cause layoffs all around the world. The greatest method to lessen the financial burden of a layoff is to maintain a suitable emergency fund. Create a reserve to cover a minimum of 6 months of spending. Keep your funds in a convenient place, such as a savings account or a recurring deposit. Additionally, make sure you have enough insurance to avert having to tap into your investment funds in an emergency.
To summarize, when it involves financial planning, errors do occur. Yet the most essential lesson to be learned is to take remedial action so that when we experience similar events in the future, we will be very well prepared for them.
