scorecardresearchFIRE: Five ways to manage emotions during market crashes

FIRE: Five ways to manage emotions during market crashes

Updated: 04 Dec 2022, 10:46 AM IST
TL;DR.
Financial Independence, Retire Early: Below five steps will not only help you make your post FIRE life smoother, it will also help you ride market volatilities with ease.
The philosophy of FIRE suggests that the investor ought to save at least 30 times of their annual expenditure before they decide to retire.

The philosophy of FIRE suggests that the investor ought to save at least 30 times of their annual expenditure before they decide to retire.

FIRE stands for Financial Independence, Retire Early. The idea of quitting employment to do what we love is new but fancy. Ideally, you plan your employment life in a way where you save enough to quit the job earlier than the standard retirement age. To achieve FIRE, you need to save and invest enough money that can last for the rest of your life.

In order to ensure that the accumulated funds last for the rest of your life, it is essential that the money invested in the right asset classes. One asset class that cannot be avoided is equity. The allocation to equities generally differs depending on the amount accumulated for this phase and the number of years for which you want to depend on the corpus. It could be anywhere in the range of 25% to 90% and depends on a lot of factors.

After FIRE, the only source of income that you have is from the returns on your corpus (interest income, dividend income, rental income, capital gains). When you are dependent on a single source of income, you may get sleepless nights if you are heavily invested in a volatile asset class like equity. There is a big likelihood of seeing frequent drawdowns in equity investments. It becomes essential to protect oneself from such drawdowns but how do you do it? Here are some ideas -

  1. Fear of losing money makes us do irrational things. Acknowledging that you are fearful of equity market drawdowns is the foremost step. You must envision different outcomes of your FIRE corpus and assess how you would react to such events. Understanding the history of equity markets is important (maximum drawdown, average time for recovery, rolling returns, etc.).
  2. Ensure that a part of the corpus that is equivalent to 5 to 10 years worth of annual expenses is held in a combination of High yield savings bank account, fixed deposits and target maturity funds. This will help you ride any short term volatility in equity markets. Whenever equity markets are doing well, keep refilling your liquidity bucket back to 5-10 years’ worth of expenses.
  3. Ensure that you have hedged your risks through insurance. Health insurance is a must. Life Insurance is not that significant once your active income has stopped. If your family (parents, grandparents) had a history of serious medical conditions, please consider critical illness insurance as well. Accident insurance is applicable if you have plans to do a lot of traveling and adventures. If corpus is just enough for retirement, you can ignore critical illness and accident policy.
  4. It is always prudent to think about near term financial goals and make adequate provisions for those in your liquidity bucket. Every few months, think thoroughly about your financial goals and ensure that you have made adequate allocations for those in your liquidity bucket.
  5. Even though FIRE means retiring early, you are not going to sit at a beach and sip on cocktails. It is advisable to stay active. Not only it helps in keeping your mind and body in shape, but it may also generate some form of active income too. Active income will reduce withdrawals from your corpus and increase the longevity of the retirement corpus and hence it will be easier to ride through the volatility.

All these above steps will not only help you make your post FIRE life smoother, it will also help you ride market volatilities with ease. The best antidote of avoiding doing irrational things during market crashes is to stay away from the crowd. In such times, ensure that you spend your time with the right people and read the right kind of things. The last thing you would want is to exit at the rock bottom market valuations.

Nishant Batra CWM® is Chief Goal Planner of Holistic Prime Wealth.

Disclaimer: The views expressed in this article are of the author, not MintGenie.

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First Published: 04 Dec 2022, 10:46 AM IST