Balancing fear, caution during financial stress

Planning, evaluation, monitoring can help avoid twin devils of fear and greed

KARACHI:

There is weight to Harry Truman’s age-old saying, “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.”

While this may be true for depression as defined in economics, the feeling of being financially depressed is far easier to achieve.

If a random survey was conducted on the financial wellbeing, the most common response across classes would be, “We don’t feel better off” and neither will they know of an individual who believes he does. Overall, the pulse remains edgy, being nervous about the overall uncertain scenario. Many individuals from the employed class have either experienced salary cuts or have experienced lower side-income, resulting in real hardships for them. The business community is not sure of future orders and sales, thus, they have slowed down their expenses.

If one looks at the pulse of economic activity, the buzz on the industrial floor and agriculture farms is near its peak. Activity across most economic zones is coming on track and nearly all industries are returning to pre-Covid levels.

Car buyers are facing delivery delays, textile export orders are falling due to supply shortages and electronics and fast-moving consumer goods (FMCG) manufacturers are struggling to meet demand while cement and steel sectors are looking at export substitution to cope with pickup in domestic demand.

Agricultural produce and outputs remained decent across all major crops, yet Pakistan continues to face sporadic shortages, primarily driven by demand spikes.

While looking at numerical barometers, all the financial markets are showing signs of healthy economic recovery.

If the stock market is a barometer to gauge economic activity, the Pakistan Stock Exchange (PSX) rose nearly 10% in CY20. It has gained ground handsomely from its peak Covid-19 period lows of 27,000 and is currently trading at around 40,000 points.

The real estate market has rebounded and is basking in glory, backed by amnesty and government support for the sector. Impetus has been further provided to the sector through monetary policy easing as interest rate has been reduced by 6.25% since the Covid-19 outbreak.

Economic growth has been further strengthened with a stable rupee against the US dollar. Global dynamics have not been very far away. Stock markets worldwide are going up alongside stable employment numbers. As pent-up demand try to grind commodity prices towards north, fear about the future keeps commodity prices under check.

However, the question here is whether this is real economic activity driving demand or this is driven by greed and a lack of alternative investment options? The biggest investment risk in the long term does not arise due to investing too aggressively but due to the excess of conservatism in decision-making.

For those who profited from the pandemic have been in unique situations but they are also ruled by fear of uncertain times and believe the upside is limited.

Spending remains limited as individuals save and stash money for the second wave of Covid-19. If not for themselves, the worry is abundant for friends and family and the impact on their finances.

With economic troubles affecting countries, the jitters have started to spill over, resulting in political uncertainty. This was compounded by the transitory period in global politics.

US electorate is due to partake in elections in November 2020, Brexit and its impact remain to be seen as the December 2020 cut-off date nears and how things pan out as China flexes its muscle by expanding its influence through increase in coverage of the Belt and Road network.

Here is a guide on how does one stay focused in these uncertain times?

Make a plan

The only way, to beat the fear and avoid greed, is to make a plan and stick to it. The game is to have the goal in mind and ignore the intermittent volatility. Focus on the path and devise a route for getting out to the other side. Keep an eye on situations that may derail the investment case and take corrective action, if any, in helping your portfolio achieve its objective.

Budget

Pre-allocate your resources, budget spending and have a kitty in place. This is to ensure that the portfolio doesn’t come under stress due to survival needs. Understand the needs and segregate the wants to know what to focus on. Keep enough on the side to potentially be able to average out and catch on when the market takes a dip.

Discuss with family

Discuss the situation with your family. They can sense the apprehension and looming financial depression and the undercurrent is felt by its members.

Online classes and work from home are new concepts that all families are trying to adapt to and discussion of the financial impact must be undertaken. This would result in an aligned family strategy and each member would pitch in to bring serenity to the environment.

Overall, the economy looks good and directionally looks on the upside but there is no potent way to neutralise the fear or reduce the greed. The only mixture that can help us to avoid the twin devils is to plan, evaluate and continuously monitor.

THE WRITER IS A STUDENT OF BEHAVIOURAL FINANCE, A TREASURY PROFESSIONAL AND A VISITING FACULTY AT IBA

 

Published in The Express Tribune, October 5^th, 2020.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.