/Most years are `Plan A years,’ but 2020 was all about Plan B

Most years are `Plan A years,’ but 2020 was all about Plan B

By Vishal DhawanAs financial planners, we often explain to our clients the concept of a Plan A and Plan B with respect to personal finances. The Plan A is all about the things that go right, and along expected lines with your financial plan: the beep of the SMS indicating that your salary has been credited to your bank account, household expenses being under control as the extras spent on international travel have been countered by lesser expenses on home improvement plans as work was too busy to actually make that home improvement, investment portfolio returns getting generated along expected lines, and wealth creation objectives on track to achieve financial goals.

The Plan B is all about protecting yourself and your family from the things that can go wrong with your financial plan – salary reductions or stoppage of salary due to a job loss resulting in the need of an emergency fund, significant volatility in financial markets causing mark to market losses in the portfolio value, the need to dip into a health care fund due to hospitalization of a family member induced by the pandemic, and the challenges of a friend unable to gain access to family wealth due to the lack of a robust succession plan.

As we often explain to clients, most years are Plan A years, but ever so often, induced by different factors, we run into a year where your Plan B comes into play. 2020 was clearly a Plan B year, induced by COVID 19.

Whilst COVID 19 had already been around on 31st December 2019, the normalcy in the daily lives of individuals, and the financial markets, started to get tested a couple of months after that. Countrywide lockdowns were not something that most people had ever imagined, and thus when they happened, they came with a fear of the unknown which was reflected in global financial markets falling significantly all over.

Whilst equity markets fell very sharply, reminiscent of the 2000 and 2008 market crashes, the shutting down of the debt schemes of a large global mutual fund in India had investors panic about their debt investments as well. This was followed by sharp salary cuts and / or job losses for a large number of individuals, and for families with loan EMIs, the need to evaluate whether to opt for a loan moratorium or not announced by the government, became a pressing question.

Investors who had a Plan B in place, that is, a robust six to twelve month emergency fund to tide over job related uncertainties, adequate health and life insurance to cover for unexpected health related events or loss of life, and a well drafted will as a part of their succession plan, could continue with their overall investment strategy without having to react to the market corrections in panic and sell. These investors benefited significantly in the second half of 2020 as financial markets made a strong comeback and investors who continued to invest regularly were able to gain from the lower prices that they had invested in earlier.

As 2020 comes to an end, the excesses of high liquidity and low interest rates as a result of economic support by Central Banks and governments world over, are starting to show in financial market valuations. As things normalise, Plan A seems to be taking centre stage again. However, do not forget the value of Plan B – it played a big role in 2020 and is likely to continue to be critical going forward as well.

(Vishal Dhawan is a certified financial planner and founder of Plan Ahead Wealth Advisors, a SEBI-registered investment advisory firm.)

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