In this article I will list some of my top Quora answers for this week.
If you want me to answer any question in the future on Quora, Youtube or beyond, don’t hesitate to make suggestions to me directly on the contact page.
In my Quora answer of this week I answered a very interesting question.
When you have been doing what I do for a while, it is amazing how stories come up time and time again and people never seem to learn their lessons from that.
Go into the “search Quora” function now and type in:
- Will markets crash if Trump wins?
- Will markets crash after 2016?
- Will markets crash due to North Korea (2018)
- Will markets crash due to the trade war with China?
- Will markets crash due to Brexit?
- Will markets crash due to coronavirus?
- Will markets crash again due to coronavirus and lockdown?
- Will markets crash due to the government shutdown in the US in (2018–2019)
There are always people worried about whether such and such event will affect markets.
2016 is the prime example of why nobody should try to trade markets based on the news.
Markets did fall, at least in the UK, after Brexit, before hitting record highs 12–24 months later (including in the UK where the FTSE hit a record high in 2018 – two years after the Brexit vote).
Almost “everybody” was expecting the US Markets to be down if Trump won.
Even most of his supporters, even though they probably won’t admit it now, expected markets to be down for maybe a few months or 1–2 years, before rebounding.
Then the shock news (for most) came that Trump was about to win!
The early signs were markets would indeed fall. The major indexes were down slightly.
Then markets finished the day up 1.4% higher!
Markets have subsequently increased big time from there, in fact they have hit numerous records.
That doesn’t mean that markets won’t crash, or soar, if Trump or Biden wins.
The point is markets, even though they have always historically hit record highs, aren’t predictable.
They can act irrationally. That makes them unpredictably. Look at this year!
US, and many global markets, hit record highs in February, even as the Coronavirus was getting worst in Iran, China and South Korea.
They then panicked. The fastest fall in history! Few thought markets would recover quickly, even with the interventions from the Federal Reserve and other central banks.
They more than recovered in the US, and are close in most major markets.
US Markets have beaten most European and other stock markets, despite the fact that most people think that the US hasn’t done a good job with coronavirus and the lockdown.
The point being, nobody knows. Markets do crash despite their long-term trend higher.
As they recover, and nobody can predict when these crashes will come, it is best to just stay invested for decades.
What were some of the other interesting questions I was asked this week?
Table of Contents
How can we save ourselves from poverty in retirement?
The easiest way is to be conservative with your assumptions. If you are conservative about how much you need to retire (double how much you assume will be enough) and other assumptions you will be fine.
More specifically I would:
- Never rely on government pensions alone as they can always move the goalposts. This became a big election issue in the UK recently. Women now need to work years longer then they expected:
2. Ideally, don’t rely on one source of income alone. If you have a government pension + another private investment, you have a better chance. Now imagine you can find a way of earning money passively? You have potentially three sources of income.
3. Semi-retire first. A second income, regardless of how small, and offline or online, can make a huge difference.
4. Make sure all debts, and dependencies such as kids education, are paid off.
5. Have a conservative buffer, especially if you are retired abroad, as this will protect you against unexpected costs like inflation.
6. Keep money invested. A lot of people think money should all be in cash closer to retirement. But cash won’t last in retirement unless you have a lot or there is deflation like what has happened in Japan. You need more bonds in retirement, but having a 50%-50% portfolio (50% in bonds and 50% in stocks) is safer than having 100% in cash. Such a portfolio is conservative, but will still likely beat inflation long-term.
7. Don’t get ripped off with annuities. Many annuity rates aren’t attractive compared to drawing down your own portfolio. People just like them as the income is fixed and secured.
8. Start investing early. Even small amounts will compound if you start early enough, and do it for long enough (decades).
9. Consider retiring in a cheaper place in your home country, or abroad, if the figures don’t add up. You could live the same standard of life for a fraction of the cost.
10. Downsize your house if needed. Together with point 9, that could be enough to retire early if you move to a cheaper place.
What shouldn’t you do when you strike it rich?
Most people don’t strike it rich overnight unless they win the lottery or get inheritance.
A lot of people “get rich quick” after years, sometimes one or two decades worth, of practice in business or investing prudently.
Some people seem to get rich quick, but this quote sums it up for me:
Anyway, to answer your question., the biggest mistake to make is to avoid the biggest disease of the successful.
This is a disease which strikes the successful in sport, business, politics and beyond.
It strikes the rich and wealthy, as much as people who are successful in different ways.
Namely it is complacency. The former manager of Manchester United, who is considered arguably the greatest manager of all times, called complacency a disease:
That’s why in sport you see teams finding it harder to retain trophies, especially over 5–10 years.
In business, or when it comes to wealth, signs of complacency are:
- Failing to diversify away from one market. I have lost count of the number of formerly wealthy people in places like Tunisia, Egypt and various Latin American countries that didn’t move away from their home markets. Many people blame people like Chavez and other politicians. But if you failed to diversify during the good times, then in many ways it is your own fault.
- Over-spending, thinking the good times will keep rolling forever
- Not being careful with re-marriages. This is something that affects some successful men a lot. Divorce can ruin wealth and lives.
- Failing to innovate. If you become successful, take advantage of that success. Try out new techniques, new products and services. For example, let’s say you have struggled for years as a real estate agent. Now you are making $60,000 a month after 10 years of trying! Well, the logical thing is to try out new markets, reinvest some of your income into ads, new services etc. Don’t stand still and be smug and complacent!
As the old saying goes, it is important to fix the roof, when the sun is shining.
That often means asking the right questions such as:
- If I was my own worst enemy or competitor, how would I put myself out of business?
- What would happen if my income falls by 50% due to X and Y event, like a lockdown? How would I adapt? Would my spending habits be good enough to deal with such an event?
- How can I diversify and pivot away from one income source alone?
A healthy degree of paranoia is good if you already have success. Being confident is great, if it is coupled with a lack of complacency.
This year has been a great example. I have ran out of the number of private business owners that have reached out to me about investing.
Many were in the sectors that have been hit hardest by coronavirus, like entertainment or trade with China.
They never asked the question, like “what would happen if there is a lockdown or regional war”?
In the same way that people earning loads from online businesses in 2020 should be thankful, but should ask questions like “what will happen if there is more regulation of the internet, or governments tax it more?”
Is the U.S. financial market in a bubble?
No. That doesn’t mean that markets won’t fall, or skyrocket in the next few years, but they aren’t in a bubble.
Although, with that being said, I would like to make a distinction between individual stocks and the whole US Market.
There are many individual stocks that are undervalued, some are overvalued and some are in a bubble.
The S&P500 only hit a record high in the last 1–2 weeks, and the Dow Jones is still a few percentage points away from its record in February.
So despite lower interest rates, loads of QE, bonds and cash paying close to zero and the lockdown making the biggest firms more profitable whilst many smaller firms are struggling, it is still below its height.
A lot of people commenting on questions like this don’t understand some basic facts including:
- There is little or no correlation between GDP growth, recession and the stock market. Markets have regularly gone up in recessions, and down in recessions. Up during moments of prosperity, and down during moments of prosperity (the Shanghai Stock Market after 2006 as an example).
- There is no connection between GDP growth and geopolitical risks, including war.
- There is no correlation between pandemics and stock markets. Indeed markets went up in 2018–2020, during WW1 and the Spanish Flu!
- When academics looked at loads of different correlations and the stock market, the only correlation they found which was clear was various p/e ratios. It wasn’t an incredibly strong indictor though, because if that was the case, people could just “market hop” from various indexes every time the p/e ratios. As an FYI, the S&P500’s p/e ratio is currently at about 30.09. To give you some context, p/e ratios hit about 45 in 1999. They briefly hit 65 in 2009. Apart from the Nasdaq, there is no market which has a crazy p/e valuation.
- The reason there is little or no correlation between markets and different variables is that there are too many variables. For example, in 2000 government bonds paid about 6%. Cash paid above inflation. If interest rates were 0% in 2000, and bonds paid as little as today, would the Nasdaq and S&P500 had fallen so hard, regardless of p/e ratios? Nobody knows, but that’s the point.
And here is the killer. I have never, not once, met somebody who can regularly know when markets will correct.
I have met plenty who get lucky a few times. But over 25 years, hardly anybody will beat the market by trying to time it.
As Vanguard’s Founder Jack Bogle said (I am paraphrasing) “I don’t know anybody who has successfully timed the market. In fact, I don’t know anybody who knows anybody who has done it over 50 years”.
If you put in every month for decades you will be fine. There will be crashes and bubbles. That comes with the territory alongside the great years like last year. It is far better to just ride out the storms than try to be too cute avoiding them.
This year is a great example. In January 1, 2020, I didn’t think US Markets were in a bubble or indeed global markets.
I didn’t think markets would crash in February or March, but I did say that nobody knows. I was wrong.
I didn’t think markets would recover so quickly. I expected maybe 2–3 years, even though I said nobody knows for sure. I was wrong.
And yet my portfolio is up a lot on the year despite being wrong twice! That is better than those waiting in cash.
Why? I invested every single month. Likewise, if markets crashed tomorrow, i would do exactly the same “boring” thing.
Just invest every month, come rain or shine. That way, if markets are down, you are benefitting from the carnage.
I only wish markets would have stayed at March levels for 5 years. What a buying opportunity!
The fact you should actually want markets to crash, and stay low for years if you are young enough, is a topic for another answer.
Can you get rich with compound investing?
The simple answer is yes but you need to do one of two things:
- Leverage time. So small contributions over decades
- Leverage money. If you already have a lot of cash, you don’t need decades. 1 decade might be enough if the markets are doing well.
Below is a great example of how it can all add up:
The biggest issue with those compound interest tables we all saw in school is the idea that it is easy to get a steady return every year.
In reality, there will be some period of time where you get 15%-30% and some years where your growth will be negative.
So compounded investing returns are based on the premise that the ride can be bumpy, but it is worth it.
What people need is to achieve it is
- Patience. It isn’t a get rich quick scheme.
- Calmness during market crashes
- Time on their side if they are young, or a lot of cash if they are starting later
It isn’t hard in theory, but in practice it can be. Many people lose heart during the worst times for the markets, and then regret it later.
Also remember that wealth and income aren’t the same thing. So getting wealthy is more than possible with compound interest.
Getting to a high-income stage takes longer, as withdrawal rates need to be conservative even if you have a lot invested.
Many studies have shown that even if you have $2m invested, you can only take out 80k a year if you don’t want to run out.
Will the pandemic burst the housing market bubble?
Not for sure. One reason for that is there hans’t been much of a bubble in many places.
Too many people just look at prices without factoring in inflation.
If you buy a house for $500,000 today, and it is worth $509,000 next year, and inflation is 3%, your house has lost $6,000 to inflation.
It is basic maths but people forget the basics – especially that inflation compounds so 2% per year isn’t 20% over 10 years of course.
So when we look at things from this more holistic point of view, we might that from 2007–2020, housing was very hot in some big Western cities, New Zealand and some emerging markets like China.
It has been stagnating or even falling in many average towns and cities, adjusted for inflation.
The UK is a great example of that. House prices in London were higher in February 2020 (before covid), compared to the peak in 2008.
That is both in nominal and real terms, adjusted for inflation. In the whole country, in comparison, house prices have risen in nominal terms, but fallen in real terms and adjusted to wages.
This graph, from House Price Crash, shows the trend for the whole of the country:
Essentially, prices were higher compared to 2015 or 2010 in real terms, but the rises haven’t been enough to offset the huge falls in 2008–2009.
In 2008–2009, the Nationwide house survey showed the average cost of owning was 183,000.
Before covid it was about 214,000. Over a 12–13 year period, that works out at about 1.1% per year, when inflation and wages have risen more than that.
I believe the trend is similar in many Western, advanced countries.
Some big cities, like New York or Berlin, have seen rising prices even adjusted to inflation, whereas many smaller towns and cities have struggled to match inflation.
Some places have never recovered from their inflation-adjusted peaks in 2006–2008 before the housing bubble bust.
The real house price inflation has came in markets which have been dominated by foreigner buyers.
An example is New Zealand, where average prices hit $1m a few years ago, after hitting $820,000 in 2016.
The government then banned foreign buyers from many forms of property ownership.
Those are the markets that might be affected the most. I was reading a few days ago that Cambodia, a country which depends a lot on foreign buyers, has seen a big fall in house prices.
So it will depend largely on the city/town, how dependent they are on tourism and foreign buyers etc.
What will be interesting is whether the dominance of big cities will end now that more people are discovering remote work.
Perhaps we could see the opposite trend in the future to the last few decades – namely deflation in real terms in big cities and inflation in those places which are ideal for stay-at-home workers.
We have already seen some inflation in those hotspots outside the big cities.
So new bubbles might form in the future.
Can losses increase my investment return?
Declines can, but not losses. By definition a loss is when you press the sell button when there is a market decline.
You can make money long-term from declines though. There are two ways you can do that:
Bonds tend to go up, at least short-term government bonds, when stocks are down.
March and 2008–2009 is a great example of that. In that situation, you can sell some of your rising bonds, and buy crashing stocks.
Simple example. Let’s say you had $100,000 invested in March. $80,000 in stocks and $20,000 in bonds – so 80:20.
In the worst of the crisis, the stocks would have been worth $40,000-$50,000, with bonds at about $21,000 if they were the short-term variety.
In that situation, you could have sold off half of the bonds, buying stocks at cheaper prices.
Now the market has recovered, your $100,000 would be worth about $110,000, depending on the indexes you picked of course.
Of course, if somebody doesn’t rebalance and just waits it out, that is another option.
The point is that bonds gives you more than cash at least, and allows you to take advantage of crashes.
It also helps manage risk. When markets are up like in 2019 or now, you can rebalance the other way around.
2. Dollar cost averaging
This is a fancy way to mean monthly investing. $1,000 for 20 years is an example of dollar cost averaging.
In this case, falling markets will benefit you. If person 1 invests $1,000 a month for 20 years, and gets 15% in the first 10 years and then 2%, he or she will have less than person two who gets 0% for the first 10 years and then 14% from years 11–20.
The reason? Compounding. If your account does better in the later years, and worst in the early years, that gives you a chance to buy cheaper units.
So the better way of putting it is declines or market stagnation is likely to increase your long-term growth, if you play your cards right.
As an aside, dollar cost averaging doesn’t mean you should put in a lump sum gradually.
Studies have shown that investing a lump sum in one go, beats dollar cost averaging on 66% of occasions.
However, most people either have a salary or a business. So most people need to dollar cost average whether we like it or not.
So most investors have occasional lump sums, but more often have a monthly or yearly surplus.
That is good in many ways as it decreases risk.