Five investment trends you need to forget in 2023

The losses in 2022 have been a blessing in disguise because they provided some serious lessons and drew attention to some investment trends that should go unnoticed in 2023.

Unlearn #1: Financial Independence before 30 or Retirement at 35: Unless you created a unicorn or owned ESOPs of a unicorn in your 20s, there’s no easy way to achieve financial independence before your 30s or even retirement at 35. Instead, these impractical dreams drive investors to chase near-impossible returns by investing the bulk of their earnings in high-risk instruments such as crypto, NFTs, derivatives and P2P platforms, which can have a devastating effect on their finances.

In a practical world, financial freedom can be achieved through the following paths:

1) Put 100% in the workplace and strive for higher income.

2) Save 40-50% of monthly income from initial years in core portfolio.

3) Invest in a portfolio built on top of an asset allocation model. Since asset allocation models are chosen based on risk profile, these portfolios protect investors from adverse risk events while maximizing potential returns over the long term.

By following these steps, one can aim for financial independence in the mid-40s with adequate allowances for responsibilities such as children’s education, housing and retirement.

Unlearn #2: Chasing an investment fad: Interestingly, only a few investors understand crypto and most get into it because of social media buzz and chatter. Over the past year, the cryptocurrency has lost 60-90% of its market capitalization.

Another relevant example is the IPOs of new-age tech companies in India, which lost 60-80% of their market value within months of listing. So whether it’s the tulip mania in the 1600s, the dot-com boom of the 1990s, or cryptocurrencies in 2021, every fad has resulted in volatile bubbles that quickly erode investor wealth.

Unlearned #3: Stock-picking is a shortcut to building wealth: The success stories of Bajaj Finance, Shree Cement, and Kotak Mahindra Bank over the past 10 years have given mainstream credibility to the theory of unusual wealth creation by identifying multi-baggers. However, these success stories hide the wastage of wealth of investors in Yes Bank, Unitech and Reliance Power. Of India’s largest 500 companies in 2010, nearly 300 failed to beat inflation, with 240 making losses for investors from December 2010 to December 2020. This means that the probability of choosing Yes Bank is higher (6 out of 10) over Bajaj Finance.

Stock picking requires extensive professional training and considerable time to evaluate businesses, which is typically not available to retail investors.

Unlearned #4: We must time the market: The market capitalization of Indian companies is expected to grow from $3 trillion currently to $25 trillion by 2035 – a 7x increase. Entering the market 10%-15% lower will result in a fraction of the additional profit after a decade. Trying to time the market has not helped much.

With such solid long-term prospects, instead of timing the market, it makes more sense to do regular SIPs in broad market ETFs/Mutual Funds without exception.

Unlearn #5: Buy Maruti Suzuki shares instead of cars: They need to tell you that if you had invested in Jet Airways instead of taking a family vacation in 2010, you would have lost 90% of your money and also missed out on great family time. Financial prudence doesn’t mean you have to live like a hermit. The whole point of building wealth is to have enough resources to maintain and improve your standard of living, mental well-being and psychological health for you and your family. As a general rule, you can use 10-20% of your monthly income for lifestyle upgrades.

Karan Agarwal is the Chief Investment Officer at Lever