The young investors who started investing in the last 5-10 years are perplexed today. The value of their investment in the company RSUs (/ ESOPs) has dwindled, IPO investment is below the offer price and the investment in cryptocurrencies has taken a huge markdown.
Inflation is at an all-time high. The Central banks are increasing the interest rate at a faster pace in large increments to tame inflation. This is slowing down the economy and may put the countries in recession. The growth of technology companies and the investment in start-ups are taking a beating. There are early signs of layoffs and the investors are worried that their job may be next in the line.
This is creating a double whammy – the Source of income and Growth of savings-investment both are under pressure. The FIRE plan needs a reset because the FIRE calculation was based on the higher return on concentrated investment in the company’s RSU and equities which is down ~30% – ~80%.
What went wrong?
Over the last decade, a good economy and the sustained level of low unemployment particularly in the US have encouraged people to take more risks and choose high-paying jobs at start-ups and new-age companies compared to the traditional stable companies. The Employees negotiated for the higher number of RSUs in place of the lower salary because job continuity was not a concern.
The same is changing now. The increase in the interest rate by the Central Bank is putting a brake on the growth of technology companies. The investors’ preference is changing from the high revenue company to the company with high income and a strong balance sheet. The companies are curtailing flab and are moving towards optimal Organization with high performance.
Some of the decisions of the employees which have worked well in the past for them are now working against them.
Over the last decade, the Equity market particularly in the US has given substantial returns in the backdrop of sustained low interest and too much money in the hands of retail investors and businesses under the pretext of the pandemic. This money has elevated the valuation of the various asset classes including Equity in turn increasing the net worth of individuals. The young investors mistook that for their superior ability to invest without an appreciation of the saying “A rising tide lifts all boats”.
They took concentrated bets by holding onto higher exposure in RSU in anticipation of faster growth of the portfolio. The investment was not aligned to the individual’s risk profile and was overweight towards risky asset classes such as Equity, Crypto Currencies and Alternative Investments with high volatility. In a bull market, this portfolio did exceptionally well but the same has taken a beating when the recession is lurching at our door.
What should young investors do?
The young investors should not lose their sleep on this. The good thing is that they are getting these precious experiences early in their life when they are playing with relatively lesser money. Financial Independence cannot be achieved in hurry. One need’s to set reasonable return expectations so that the investment decisions are practical and achievable otherwise they will backfire.
They need to follow the structured approach, stay away from confidence bias, move away from emotional decisions and avoid decisions in a hurry. They should create a goal-based Financial Plan and invest in diversified assets as per the asset allocation according to the risk profile.
When it comes to the job, they should put their best effort at work as securing income is very important. The savings from the job has to be deployed optimally and in time so that the invested money works hard for a longer period.
Please note that the bear markets are far and few, and one cannot afford to lose this opportunity to build their portfolio for tomorrow just because their existing portfolio has taken a beating.
If you need help in choosing a Financial Advisor, you may want to go through the article How to Select the Best Financial Advisor in India.
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services.
He has advised many clients in India, the US, Europe, the Middle East, South East Asia and Australia.
To know more about him, click on https://finmyn.com/about/.