Should I Exit Equities?

Recently I was having a chat with my old college mate who also works in the financial industry. He was worried about the stock market going up while the economy was going down.

Should I sell my equities and enter later?

If you have been reading my blog, you know my answer by now.

I have no freaking clue on what will happen to the markets in the near term.

I have spent enough time analyzing several past predictions and know that timing the next crash is too difficult (rather impossible in my view). Even if I am lucky to get out at the right time, to get back into equities at the right time is even more difficult.

The only time I would want to be partially out of equities would be in case of an extreme bubble.

So I have a framework (check here) to help me evaluate if there is an extreme bubble which in itself is a very rare event and we should expect it once in 7-10 years.

But here is where something extremely basic stuck me?

Most of the “asset allocation is the key”, “tactical asset allocation improves risk adjusted returns” narratives are basically meant for someone who has already accumulated wealth.

Since the entire wealth management industry is built around the wealthy families, for them wealth preservation is the key rather than wealth creation.

So the advice that we listen to in the media from experts is mostly meant for the high net worth individuals.

For many of us, who are in our early careers, investment advice has to be a lot different. And most importantly damn simpler!

Why?

That is because there is a multi-bagger asset class which you and I are completely ignoring.

Any guesses as to what that is?

YOU!

Yup, you heard that right.

If you are in your 20s or 30s, your future earnings (and corresponding savings) is your largest asset class.

Unfortunately since no one reports it as a number in our portfolios, we completely forget this component.

Now ideally, you can take a spreadsheet, workout your increasing salary growth, savings rate and discount it to today’s value to get the present value of your future savings.

By now you must have closed this article.

I get it. While theoretically that is correct, let us be honest. It is just too boring and painful to do all this.

I am on your side. I just can’t get myself to do this.

But yet ignoring this large value will mean, we start giving undue importance to our otherwise minuscule portfolio value (relative to our future savings potential).

So here is a simple hack

  1. How many working years till retirement – X years
  2. What is your annual savings every year – Rs Y

Your approximate portfolio value from your future portfolio savings = X*Y

If it is getting over your head, no worries, let me explain with an example

  • Say you are 30 years old and you can earn till 60 years
  • Your salary is Rs 20 lakhs a year and you save 30% i.e Rs 6 lakhs every year
  • Your current portfolio value is 20 lakhs and is 100% into equities

To roughly approximate your future savings potential:

Savings every year * No of earning years left

6 lakhs * 30 = Rs 1.8 cr

Earlier, your portfolio value was Rs 20 lakhs and 100% equity allocation.

Now when you add the Rs 1.8 cr to your portfolio it becomes Rs 2 cr.

Rs 20 lakhs in equities and Rs 1.8 cr in YOU (consider this to be debt assuming you can steadily keep saving)

So suddenly your asset allocation becomes 10% Equity:90% Debt. Voila!

Now tell me, should you be worried about your equity allocation and try timing the market. Suddenly this whole asset allocation is the key narrative, looks silly. As the majority asset in your portfolio is actually YOU.

Till your current portfolio becomes greater than your future savings potential value, don’t complicate your life trying to take asset allocation calls, timing markets etc.

The moot point is:

If you are young and understand equities, just keep it simple and have the maximum allocation to equities (provided you can tolerate the ups and downs).

Relative to your future savings potential, most often than not your equity allocation is not as high or critical as it looks!

So let us focus more on improving our skills, earnings potential and keep our portfolio simple. We shall worry about asset allocation calls some other time in the future!

As for my friend and me, we will continue to focus on our careers and let our equity portfolios compound in peace.

Happy New Year and as always Happy Investing 🙂

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

2 thoughts on “Should I Exit Equities?

  1. As always, really new, innovative and refreshing thought. It is YOU, who is the most critical and important asset class, so invest in YOU and leave everything aside. I agree that for entire wealth management industry, probably, wealth preservation is the key rather than wealth creation.
    Some percentages here and there in your asset classification would not get you to become a billionaire. Rather, your ability to earn money (rather than ‘make’ money – I mean through investments) is more important which we all forget because we all think that ‘making money’ is easier than ‘earning money’, which is of course not the case.

    Like

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