Losses in 2022 have been a blessing in disguise as they provided some sobering lessons and directed the spotlight towards some of the investing trends that must be unlearnt in 2023.
Unlearn #1: Financial freedom before the 30s or retirement at 35: Unless you have created a unicorn or have ESOPs of a unicorn in your 20s, there is no smooth path to attaining financial freedom before your 30s or retirement at 35. Instead, these impractical dreams induce investors to chase near-impossible returns by putting the bulk of their earnings in high-risk instruments like cryptos, NFTs, derivatives, and P2P platforms, which can have a catastrophic impact on their finances.
In a practical world, financial freedom can be achieved through the following path:
1) Put 100% into the workplace and strive for higher incomes.
2) Save 40-50% of monthly income from early years in the core portfolio.
3) Invest in portfolios constructed on top of asset allocation models. As asset allocation models are selected on the basis of risk profile, these portfolios protect investors against adverse risk events while maximizing return potential over the long term.
Following these steps, one can aim for financial freedom in their mid-40s with sufficient allowances for responsibilities like children’s education, housing, and retirement.
Unlearn #2: Chasing investment fads: Interestingly, only a few investors understand crypto and mostly entered it because of social media buzz and chatter. In the last one year, cryptocurrencies have lost 60-90% of their market value.
One more relevant example is the IPO of new-age tech companies in India, which lost 60-80% of market value just a few months after listing. So whether it’s Tulip mania in the 1600s, the dot-com boom in the 1990s, or crypto in 2021, every fad has resulted in unsustainable bubbles that wiped out investor wealth quickly.
Unlearn #3: Stock-picking is a shortcut to build wealth: The success stories of Bajaj Finance, Shree Cement, and Kotak Mahindra Bank over the last 10 years have given mainstream credence to the theory of building abnormal wealth by identifying multi-baggers. However, these success stories hide the wealth destruction suffered by investors in Yes Bank, Unitech, and Reliance Power. Out of the largest 500 companies in India in 2010, nearly 300 failed to beat inflation, with 240 creating losses for investors from Dec 2010- Dec 2020. It means there is a higher probability (6 out of 10) of picking a Yes Bank than Bajaj Finance.
Stock picking requires extensive professional training and ample time to evaluate businesses, which is usually not available with retail investors.
Unlearn #4: We must time the market: The market cap of Indian companies is expected to expand from $3 trillion at present to $25 trillion by 2035—a 7x growth. Entering the market at 10%-15% lower levels would account for a fraction of additional gains after a decade. There are no substantial benefits resulting from trying to time the market.
With such long-term solid prospects, instead of timing the market, it makes more sense to have regular SIPs in broad market ETFs/mutual funds without exception.
Unlearn #5: Buy Maruti Suzuki share instead of car: What they need to tell you is that had you invested in Jet Airways in 2010 instead of taking a family vacation, you would have lost 90% of your money and also missed out on great family time. Financial prudence does not mean that you have to live like a hermit. The entire point of wealth building is to have sufficient resources to sustain and improve living standards, mental well-being, and psychological health for you and your family. As a thumb rule, you can use 10-20% of your monthly income to lifestyle upgradation.
Karan Aggarwal is the chief investment officer at Elever
