Stick to these 2 basic tenets of saving and you can sail through any market crisis

By Dhirendra Kumar

I often say that if investment advice has an expiry date, then it’s already dead. Only if it stays relevant for years is it of any use. Sometimes, readers write back and quibble about this and ask for examples, so here they are.

The following are excerpts from something I wrote a decade ago, as the recovery from the huge crisis of 2008-09 started. As we struggle with a crisis of sorts today, it’s fascinating to note how arguments I made in October 2009 hold true today.

The last couple of years have seen savers getting worried about the kind of things that only investors used to bother about earlier, and with good reason too. By savers I mean people who put away money in banks, insurance, mutual funds and other such assets. Investors, on the other hand, are people who trade in investments. Typically, savers just salt away money and dip into it only when they need it, but investors buy and sell based on their expectation of how the markets are doing.

At this point of time, the mood in markets around the world has settled into one of optimism. The fact that it has settled is important, because it tells us about the quality of the mood, and carries more information than bare numbers. Till a quarter or so ago, there was an underlying tentativeness in investors’ behaviour. They knew the story, they could see the direction and they could understand the logic, but they hadn’t forgotten the horrors of 2008. Like survivors of a great disaster, they couldn’t believe it was over. Is this shift in perception justified? Perhaps it is, but there are some pretty strong opposing arguments also. Let’s see what the arguments on both sides are.

The optimistic view: It’s true that the crisis was a severe one, but a great deal was done to resolve it and all of it succeeded. Economic growth is back across the world. Moreover, India and other emerging markets have proven to be resilient to the worst impact. From an investors’ perspective, the downturn wasn’t all bad news. As the economic outlook deteriorated, equity prices plunged. However, the bad news was overdiscounted. Corporate growth and profit numbers were never as bad everyone feared they would be. Moreover, they’ve recovered quite sharply. The global economic decline was nowhere near as bottomless as the doomsayers would have had us believe.

Perhaps the most important factors were the strong actions that governments took to arrest the crisis. As much as the actual actions, the most important discovery of 2008 was that governments are capable of quick and decisive action. When situations threaten to spiral out of control, there’s someone to bring it back under control.

The dark side, those who think the worst may still be ahead: The root cause of the crisis was a huge liquidity glut which encouraged ignoring of risk and inflation of asset prices. Not only has this not been solved, huge chunks of ‘stimulus’ may have made it worse. What we see in the stock markets, commodities and in real estate is the same asset price inflation that is driven by excess liquidity without regard for fundamentals.

Those are two sides to the debate and the logic in both is impeccable. Which one will appeal to you more depends on what sort of a mood you are in and that depends more on what kind of personality you are. Let’s appreciate that either view may be right.

But isn’t that a problem for the ordinary saver? Not really, as long as he realises that none of this has much bearing on how he should save. Through the panic of 2008 and the surge of 2009, one thing became clear. This may have been the worst economic crisis the world had seen for a long time, but those who stuck to the basic tenets of savings could well have slept through it. All one needed to do was to make sure that firstly, money required in the short-term was in bank deposits and other safe assets. Secondly, long-term money that was in equity-backed funds had been invested gradually over a long period. Those whose investments conformed to these principles came out fine through 2008-09, and will come out fine again regardless of which of the above two scenarios is closer to the truth.

(The writer is CEO, Value Research)