Portfolio Ideas. Worried about job safety?

The stock market has been scaling new highs. Yet, companies are working hard to cut costs and stay competitive. For many, the anxiety of a job loss is much more than the anticipated pleasure of earning higher-than-normal returns from the market.

Are you one of those living in constant fear of your company downsizing? In this article, we discuss how you should financially adapt to the increasing job uncertainty.

You own two assets as a working professional — investment capital and human capital. The former is your savings channelled into appropriate investments to meet your life goals.

The latter is the present value of all your future active income till you retire. Integrating the two assets will help you manage your lifestyle better.

The fact is it is easier to change your investment capital than your human capital.

After all, acquiring new skillsets is more difficult than reducing your equity allocation and investing more in bonds. It is for this reason that you should make financial adjustments if you are anxious about your income stream.

If you do not have existing liabilities, do not borrow till you stabilise your income stream. This means you should postpone your purchase of real estate (self-occupied house).

But what if you already have a mortgage? You cannot easily modify your loan structure.

So, continue making your regular repayments. But even if your home loan interest rate declines in the near future, do not prepay to reduce your borrowing cost.

When you prepay your home loan, you convert your bonds or equity investments into real estate investment — your investment in the house goes up when you reduce your outstanding loan. This can become problematic for, if the need arises, it is difficult to turn real estate into cash compared to equity or bonds.

You are, after all, worried about finances in case you lose your job. Your anxiety will be lower if you have fixed deposits earning interest than if you have money locked up in a self-occupied house.

You should have more bonds than equity in your portfolio if you are anxious about your income stability.

Less equity

Your investment portfolio should counter-balance the volatility in human capital.

This means highly volatile income should be moderated by a stable investment portfolio; such investments can supplement your monthly cash flows if your active income declines. Your stable income investments should include bank fixed deposits and tax-free bonds.

Then, there is the emergency fund — the account that you created to meet temporary living expenses if there is a loss of income and for having to pay for medical emergencies. This fund should be adequate to cover at least three times your monthly living expenses.

Given the uncertainty in your income stream, you should increase your emergency fund to at least six times your monthly living expenses. This fund should be equally balanced between money in savings account earmarked for this purpose and in bank fixed deposits.

You may also be tempted to reduce your current consumption. If so, you should first reduce your recurring expenses, not the one-off expenses.

Why? For one, you will be able to reduce 5-7 per cent of your routine living expenses such as groceries and transportation. For another, when will you spend on dining or entertainment if not now?

After all, you will have to cut your discretionary expenses if your worst fear about downsizing comes true.

The writer is the founder of Navera Consulting. Feedback may be sent to portfolioideas@thehindu.co.in