scorecardresearchDoes market volatility hamper the FIRE strategy?

Does market volatility hamper the FIRE strategy?

Updated: 31 May 2022, 07:37 AM IST
TL;DR.
With the current market fall, and if you’ve started your investing FIRE journey after the pandemic, then this strategy has brought down your portfolio returns by ~10 -15% from its high, leading to a delay in retirement years by another 3-4 years. Know what should you do to avoid such struggle in your FIRE Journey.
Does market volatility hamper the FIRE strategy?

Does market volatility hamper the FIRE strategy?

Every Sharp Rise has a Fall,

Sooner or Later,

This too shall pass!!

It’s not a poetry any how yet, though it reflects the current Indian stock market situation where the stock prices, which have extraneously inflated after the Covid’19 pandemic has finally taken some relief.

For investors who have started their FIRE Journey, a few years ago might face some panic or red blood in their portfolio, today.

However, in FIRE movement, where higher the savings rate gives you the opportunity to attain early financial freedom but with higher volatility the hampering of financial goals will become inevitable.

To avoid such struggle in your FIRE Journey, one needs to have a proper back-up plan.

Let’s say, on an income of Rs.1 lakh/month - you save 80% every month, with a minimal spending on your lifestyle & invest all-in equities for better returns with a plan to financially retire after 10 Years with a corpus of Rs. 2 crore, assuming the 14% per annum return on investments.

With the current market fall, and if you’ve started your investing FIRE journey after the pandemic, then this strategy has brought down your portfolio returns by ~10 -15% from its high, leading to delay in retirement years by another 3-4 years.

Besides, if you didn’t create the emergency corpus in such a belief that equities are liquid or will sell the holdings whenever required then, surviving in the inflationary scenario will even hit your pockets harder. Thus, leading you to stop following the FIRE Movement or you’ll start investing less or even worse, take a debt to fill out rising costs.

To avoid such liquid crunch, start building an emergency corpus for at least a year & half (18 Months) rather than for 6 - 9 months (Read my previous article: Do we need to follow Thumb Rule 50:30:20)

As, the emergency corpus (returns are either in-line or below inflation rate) is to support crucial times like this, where you can’t control the rising prices or job loss or zero multiple source of income. That’s where you require plenty of cash to avoid such hampering in your portfolio & lifestyle.

Also, you don’t want to miss sitting on the bandwagon to re-enter into the fear market.

Market falls are a great opportunity to be greedy but exhausting the entire capital is not a smart financial decision. It is always better to set aside a liquid corpus for such bad times because

You never know what tomorrow will bring.

Therefore, to survive such crises, either build an emergency corpus for a longer period or create a second/multiple source of income which lets you sustain during the crises.

With FIRE Movement, you can achieve early financial retirement but only with one condition i.e. you must be ready for the crises with regular flow of income.

Disclaimer: The view shared above is the author's personal views based on the client interactions & research. Please consult with your SEBI Registered Investment Advisor or CFP before taking any Financial Decision.

Sanchit Taksali, is a Certified Financial Planner with more than 7 Years of Financial Industry Experience. Currently, he is handling the Wealth Management Department at the Sebi-registered investment advisory company Kedia Capital Services. He can be found on Twitter at @sanchittaksali and on Instagram at SanchitTaksali.
 

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First Published: 30 May 2022, 10:48 AM IST