Top 5 financial lessons for 2021 | Biggest financial learning from 2020

If I look back and summarize the year 2020, all I can say is - “It was a roller coaster ride.”

And if you look at the Sensex chart, it was really a roller coaster ride where Sensex crashed from the high of 42,000 to the level of 26,000 creating huge panic among investors. And within 1 month, it recovered like nothing happened and finally closed the year at an all time high of 47,751.

But as we look at 2021 with hopes for a brighter future, there is a lot we can learn from 2020. So I have identified the top 5 lessons from 2020 that can be implemented in 2021.

#5 “Emergency fund is a must”

2020 would be written down in the history for COVID pandemic. Many businesses were shut down and a lot of jobs were lost. I personally know people whose businesses collapsed and people who lost their well paid job. Some had their monthly EMIs and some were living on rent. Due to the loss in business and job, they were not even able to pay the EMIs and monthly rent. Nobody had imagined this situation in their wildest dreams. But it has taught us the importance of having an emergency fund irrespective of how good your business is or how good your skills are.

Unfortunately, a lot of people in India make this mistake where they do not build emergency fund. And when they require money due to unexpected situations, they end up either breaking their investment or borrowing from friends and family.
So if you haven’t built an emergency fund yet, make sure that you start building an emergency fund that can cover 6-12 months of your expenses.

# 4 is “Medical insurance is extremely important”

Healthcare cost in India is rising at a very fast rate. Few days of hospitalization can cost lakhs. But many people tend to ignore medical insurance. However, Covid has reinforced the importance of medical insurance. One of my friend’s parents got Covid positive and had to be hospitalized in the ICU. 

Within 10 days, they had a total bill of 3.5 lakhs. Unfortunately, they didn’t have medical insurance. My friend had to break all his savings and over and above borrow money from others to take care of the hospitalization cost. Now, he has learned the importance of medical insurance. I hope you will not repeat the mistake and ensure that every member of your family is covered with medical insurance.

Moreover, this is a wake up call for those who still live an unhealthy life. Guys, health is the most important aspect of our life. I would urge you to live a healthy life. Do some physical activity like jog, walk, yoga, dance, anything! Avoid eating too much junk food. And avoid taking too much stress. Health is wealth. I know it is a cliche but in the race of earning more, we tend to ignore our health. So make sure you live a healthy life so that you don’t ever have to use your medical insurance. By the way, there is a bonus. If you live a healthy and disease free life, you will have to shell out a lesser premium for your medical insurance.

Lesson #3 is “Nobody can time the market.”

Ideally, everyone wants to invest when the markets are at bottom and exit when markets are at peak. While it is easy to identify the bottom and peak on hindsight, it is impossible to do it in real time. For example, today Nifty is at 14,000. But can you say that it is the peak? No. It can even touch 15,000 or even more. Or it can also fall tomorrow.

I remember during the stock market crash in March 2020 when Nifty touched 7,600, many people didn’t invest the money. They were saying that Nifty will touch the level of 6,000. And when Nifty recovered to the levels of 8,000, they were waiting for it to touch the previous bottom of 7,600. When Nifty recovered to 10,000 they were waiting for it to touch the level of 8,000. Today, Nifty has touched the level of 14,000 and many people are regretting their decision of not investing in March-April and still waiting for the market to fall. So this has again reminded us that nobody can time the stock market. And if someone says that Sensex or Nifty will touch “X” level or “Y” level in the short term, the person is fooling you.

The right strategy is to keep investing systematically over a period without trying to time the market.

#2 “Be fearful when everyone is greedy and be greedy when everyone is fearful.”

I am sure many of you would have heard this quote from Warren Buffett. Personally, I am a huge fan of Mr Warren Buffett and he always says that be fearful when others are greedy and be greedy when others are fearful. 

Year 2020 has again proved that this is a very important message for investors. We saw the extremes of fear as well as greed. Market crashed almost 40% due to extreme fear of Covid. But that was the time for investors to be greedy and invest more. Although it is very easy to look back and say that I should have invested in the March crash.

But let's be honest, in March, the way Sensex and Nifty were falling, the first emotion would be fear. Many people told me that “Sahil, it is easy to say that be greedy when everyone is fearful. But when the market is crashing, how can we become greedy?” 

And that’s where you need a lot of conviction on your investments to go against the tide and become greedy when everyone is fearful. And in order to get that conviction, you need knowledge. For example, I knew that HDFC Bank would surely jump once the situation would improve. Likewise companies like Reliance, TCS, Maruti, Hero motocorp, eicher motor, Asian Paints and many more.

And I keep saying that you should never depend upon others for investment tips. Learn yourself because investment in knowledge will pay the best interest. In case, you want to learn everything about money management, I have created a video course where you can learn about mutual funds, stocks, insurance, tax planning, etc. in a structured form. You can get the website details in the description box.

To be really honest, when the market crashed, I got excited. I was waiting for such a kind of fall for a long time and grabbed the opportunity with both hands.

I knew that this fall is temporary and stock markets will recover. However, to be really honest, I never imagined that markets would recover so quickly. On top of that, I never imagined that markets will make an all time time by the end of the year. Which definitely has created a lot of greed among investors. Many new investors are entering for the 1st time when markets are at all time high. The current stock market valuation makes me fearful.

So I am very cautious about my investments and also suggest everyone that you should also be cautious. Having said this, you got to remember lesson #3 that nobody can time the market. You should keep investing but ensure that you balance your investment between equity and debt. So that if there is a correction in the future and everyone gets fearful, you can use the opportunity to become greedy and invest more.

#5 “Digital is the future.”

While everyone was considering the future as digital, Covid pandemic has confirmed that the future is certainly digital and it is happening now.

So as an investor it is important to look at sectors and companies that operate in digital space or implement the latest technology.
For example, the entire IT sector in India has a bright future. India is the #1 country in the world for IT outsourcing and there are many top class companies in the IT space.
Telecom is one sector that would play a key role in digital transformation.
Not only this, if you look at any sector, technology would be a key differentiator. For example, in banking, UPI payments have revolutionized the way we transact. Earlier, it used to take days for payment. Now it takes a few seconds. Banks that will implement the latest technology will have an edge over the competitors.
Similarly, technology would play a key role in sectors like Automobile with eclectic vehicles, Retail with ecommerce, insurance, fmcg, etc. In fact, technology would be a key differentiator between a successful and an unsuccessful company.
So when you invest your money in 2021, do consider technology as a key parameter for shortlisting the companies.

PS: To learn more about how to select quality stocks, you can explore my video course on everything about money management: