How Levered are You to the Market?
After the market bloodbath of 2022-2023, is your career/investment portfolio aligned with your risk tolerance?
Word Count: 700 Words
Chat-GPT Generated TLDR:
The article highlights the impact of market conditions on career and financial planning.
It urges readers to align their market exposure with their risk tolerance, and outlines the pros and cons of low and high risk approaches.
Introduction
Everyone has a different amount of leverage (or exposure) to current market conditions. Since March of 2020, we’ve had three distinct market regimes (terrible→terrific→terrible).
Friends, colleagues, and enemies alike have had both tremendous successes and catastrophic failures over this time. The extent of pain in 2022-2023 (and success in 2020-2021) was in large part due to exposure to the market. During this time, the macro forces have been so powerful that idiosyncratic performance both career-wise and investment-wise often took a back seat to broader market conditions.
Current tough market conditions manifest differently for people:
The value of vested equity compensation in companies has significantly devalued
Startup are scrambling for suboptimal funding rounds while downsizing growth targets
Allocators are having difficulty raising capital (even name-brand or second/third funds)
Even the 60/40 equity/bond portfolio experienced major drawdowns
Those with a more low-risk and steady approach to their career or portfolio have managed through better. While they had intense FOMO when the 2021 market was cocaine bear, the last year and a half has been a relatively good period for the more risk-averse.
What is Your Market Beta?
Understanding your own market Beta helps you review whether your market exposure aligns with your risk tolerance. Are you positioned more like a volatile technology stock or a stable utility company?
In the equity markets, the S&P index, is a benchmark. A Beta of 1.5 signals a 1.5% change for every 1% market change in the S&P. High Beta relates to higher exposure to market conditions (growth names like technology), while low Beta denotes less market exposure (value names like utilities).
Assessing your market Beta involves holistically weighing current and future projected income from career and investments, outstanding debts (student loans and mortgages), and living expenses/costs. People starting to try to build wealth can ask themselves two questions:
What is your benchmark based upon your risk tolerance?
Are you holistically positioned to hit that benchmark?
There are advantages to both Low and High Beta strategies at different times and there are even advantages to dynamically changing strategies. A common approach is to have a higher Beta benchmark in your early career, although individual risk preferences vary. My grandma still full-sends in the equity market and it’s worked out.
The Low Beta Approach
The consultant, account, lawyer, or corporate warrior who has predictable cash compensation each year and invests into money markets or short-term treasuries is low Beta. The cash flows are predictable, comfortably stable, and income will vary with economic conditions, but not to the extent of other careers or portfolios.
This bucket also includes jobs with a high cash percentage of compensation, or low compensation variability. Bankers in non-cyclical verticals with steady business or developers paid with mostly cash fit here. As do those running a market-neutral hedge fund, or risk-averse investment portfolios (retirement accounts, money market, short-term treasury or low volatility value stocks).
The High Beta Approach
Launching or working for an early-stage start-up is high Beta, as your ability to raise capital to expand your business (and stay afloat), increase early stage revenue, and eventually exit all depend on market conditions.
Working at a venture or hedge fund is also high Beta (for capital raising and directional fund strategy performance). Employees with a high equity (relative to cash) compensation package fit here. Roles like real estate agents or business development can experience sharp market cyclicality, as transaction volumes fluctuate with broader market health. High-risk investment portfolios with large equity, growth, or market-exposed alternatives belong as well.
Adjusting Your Market Beta
People often adjust their market Beta by changing careers or altering their investment portfolio's risk level. For example, a consultant can increase their Beta by investing heavily in the equity market or startups, whereas a startup employee might invest in short-term treasuries to reduce market exposure.
Idiosyncratic Exposure and Diversification
While market conditions play a substantial role, individual performance or idiosyncratic exposure ultimately should drive in the long term. Poor market conditions are not an excuse for poor allocation decisions when you answer to stakeholders. Moreover, diversification is key, ensuring that different elements of your portfolio (career, real estate, investments) aren't overly correlated, thus mitigating risk.
That’s 700 words and I’m out! Until next time…