This article will look at some of my Quora answers for this week. If you want me to answer a specific question on Quora, or indeed on my website, you can email me – firstname.lastname@example.org
Long-term it almost certainly will be better. Hopefully knows the short-term.
So the best way to invest in markets is long-term and in conjunction with a government bonds index, especially if you are older.
The following charts tell a thousand words:
The mistake many people make is getting disheartened if their returns are bad for a few years.
They read things online like the S&P500 has historically done 10%, or 6.5% adjusted for inflation, and think it will always do that.
The reality is an average is merely an average. Most 5 or 10 year periods will overshoot or undershoot those averages by a lot.
So you could end up with 16%+ a year in a bull market or much much less.
The easiest way to capture those good years and decades is also to be long-term.
A certain amount of cash for emergencies is fine but it is clearly not an investment any longer in most countries.
It pays below inflation as you say, so you can’t make any money form it.
The only way you can is by taking a big risk and investing in say an emerging markets bank in local currency.
There are two types:
- Those that adapt to this new reality.
- Those that don’t adapt and just become bankrupt and start over again. This applies to the lions share of sports stars who go bust, including an estimated 60%-70% of basketball stars who earned millions for a relatively short period of time before retirement in their 30s – NBA Stars Who Blew Their Millions. And that 60% only includes the first 5 years + those who have became completely broke! Imagine if we extended the study to include 30 years + those that have lost most of their wealth!? Could be 90%!
For the top one, they adapt by being more frugal. Perhaps downsizing their home, cars or lifestyles:
However, in realty, it isn’t as easy as you might think. There is a simple reason for this. If you have spent years or decades living in a certain way, it isn’t easy to change your habits.
People often process it as a loss. Losing something is more painful than gaining something for most people.
So the feeling of losing the ability to fly business class is much more painful than the pleasure of gaining it in the first place, as an example, for many people.
So often people struggle to downsize for the same reason they struggle to be good investors.
They are more motivated by avoiding losing something, however unlikely, than gaining something.
It is called loss aversion in cognitive psychology:
It is also one of the biggest reasons why people overspend in the first place, even if they aren’t enjoying those activities.
Fear of missing out (FOMO) which is linked to loss aversion, holds that people might go out to bars, cafes and restaurants with people, even if they know there is a high chance they won’t enjoy it that much, just in case they are missing out on that one big event/great night which makes it all worthwhile.
I have met countless high income people who also spend 100% of what comes in because, quote, “I could die tomorrow”.
So even though the chances of that happening are less than 0.01% for most people, and a lot of the spending is out of habit, they are trying to avoid the worst case.
Sensible wealthy people avoid high lifestyle inflation (spending more as you earn more) to avoid this “painful” experience where you struggle to downsize if business gets tougher due to something like 2008 or coronavirus.
This answer will surprise a lot of people because the conventional wisdom is you can’t get high returns and low risk.
Now what is true is short and even medium term, risk and return are quite connected.
Not always. You get 0% in the bank in most countries with loads of currency and inflation risk!
However, the best performing long-term investment, equity markets, can easily go down over the short and even medium term.
The first graph shows the historical performance of different assets:
So stock markets, long-term, have outperformed. Now let’s look at your chances of losing money over time:
Now let’s add some bonds to see how the graph changes:
So if you invest 100% in stock indexes in your 20s, 30s and 40s, and then increase your bond allocation before retiring, that is much less risky than being 100% in cash or even 100% in bonds.
Volatility and stability/risk aren’t the same thing. This is a key mistake to assume that more volatile assets are more risky, just because they can crash despite the positive long-term performance.
The biggest risk of markets isn’t markets themselves but you. The only long-term investors who have lost money in markets have either panic sold, market timed or tried buying individual stocks.
Nobody that has bought an S&P500 or Total Stock Market exchange fund for 30 years has lost money.
In comparison, loads of people, literally hundreds of millions, have lost to inflation in the bank, commodities or even with emerging market bonds.
So time is one of the only free lunches in investing. If you leverage time to your advantage, you can increase your returns and lower your risks by buying every month for years and only increasing bond allocations once you are older.
Even during the Great Depression, somebody who bought markets every month was actually up by 1937, after the huge falls in 1929, and very much positive if they held on for their lifetime.
So if you want to reduce risks as much as positive define “long-term” in the literal sense…..buying from your 20s until you die…..
You would have to be very unlucky to lose with that strategy.
They are speculations and not investments like all currencies. There is a simple reason for this.
The USD can’t go up against the Euro at the same time as the Euro goes up against the USD.
Likewise, Bitcoin can’t go up against the USD at the same time as it falls against the USD.
It is a zero sum game. One will go up against the other. Each person thinks they are on the winning side of the trade. Each trader thinks they are smarter than the other.
There is only one difference. With the USD, at least banks will give you some money for it.
Granted, it is 0%-2% in most countries now, which is below inflation and much lower than other assets have paid.
However, it’s value is based on something. Whereas people only buy Bitcoin based on the hope that the person coming after them will pay more than they paid for the same asset.
Jack Bogle, the late Vanguard Founder, explains it perfectly here:
That doesn’t mean it can’t go up, or down. It merely means it is a speculation and not an investment.
As the value is merely based on supply and demand, and isn’t held up by a dividend, yield of coupon, by definition it can go up or down dramatically and for no other reason than human emotion.
Also remember that there are many regulatory risks as well. Jim Rogers and others have wisely pointed out that even if Bitcoin succeeds, there is a reasonable chance governments could take the “china approach” and ban certain types of trading.
Even in this optimistic scenario, Bitcoin could become a victim of its own success.
So the fantasy that some of these “Bitcoin bulls” have that Bitcoin is going to take over fiat money, and the regulators will do nothing about that, is for the fairies.
If you are really curious about it put 1% of your total assets in it and thank your lucky stars if it does well.
The main reasons are:
- Stocks have historically gone up during pandemics, including in 1918–1920 when there was a world war. They have also gone down during pandemics. But there is no correlation historically between pandemics and markets going down. They have moved in both directions.
- What is new is that most stocks are owned by richer people and especially financial institutions like hedge funds, banks etc. In the 1950s, most of the markets was owned by middle-class people. These days, 75%-90% is owned by institutions. Even though over 50% of people in some countries own stocks, of course many people have small amounts in the markets. So provided that richer people and especially institutional investors like banks are buying stocks, the general economy doesn’t have to be an indication of where stocks will go.
- There isn’t many places to put your money now with interest rates at 0% and real estate seen as riskier than liquid assets during a lockdown.
- There are more people who know the basics now. In particular that nobody can predict markets but they have historically always gone up long-term. So if you are buying in 2020 for 20–30 years or longer, who cares if markets crash tomorrow or in 2021, or soar in value?
However, the absolute killer reason is this. No reason whatsoever!
Stocks have gone up and down during:
- Hot wars like WW1
- Trade wars
- Government shutdowns
- various geopolitical crisis
Type the following questions into the search bar in Quora:
- How is the stock market able to go up during the government shutdown? 2018–2019
- How is the stock market able to go up during the trade war with China? 2018–2020
- How is the stock market able to go up during the nuclear stand off with North Korea? 2018 especially.
- How is the stock market able to go up despite the election of Trump? 2016
- How is the stock market able to go up despite the fact Brexit only happened 1–2 years ago? 2017–2018.
- How is the stock market able to go up despite rising US interest rates and less QE? 2019.
You will notice that people are always bemused and perplexed why markets can soar during periods of instability, and fall during periods of stability.
Markets don’t react in a rational or predictable way short-term. It is just the media that likes to persuade people that they can see the future and explain every market movement.
Stories sell more than just admitting that you don’t know why markets have fallen or risen short-term, but they have always been a great historical long-term bet.
As an aside, there has been a big difference between the Nasdaq and other indexes.
Many investors have bet on it in a big way even compared to the S&P500:
I will make two points:
- Nobody knows. I have yet to meet somebody who can consistently time markets, including those that look at various p/e ratios and historical correlations. So don’t worry about it.
- You should want a lost decade – if you are a long-term investor that is.
Let me illustrate this point. Let’s compare two investors. Both invest $1,000 for 20 years. So they both invest $240,000 over 20 years.
Investor A invests has 10 years where his or her account is going up by 16% per year (similar to how US stocks performed in 82–99).
Then he or she has a lost decade during years 11–20, achieving 0% growth.
Investor B gets 0% from years 1–10, similar to 2000–2010 which was a lost decade.
However, he or she gets about 13% (similar to how the US markets have performed from 2010–January 1, 2020).
What are the results?
Investor 1= $416,794 after 20 years
Investor 2=$657,119.89 after 20 years!
So Investor 2 has gotten about $240,000 more, for investing the same, and despite the fact that 13% a year is less than 16%.
Why? Compounding. Investor A got those excellent 16% per annum returns during a moment when his or her accounts were worth less.
In comparison, getting 13% growth on your portfolio in year 18, 19 or 20 is a lot more money.
So a good investor should see themselves like an art collector:
When we are young or even early middle-age (50–55) we should celebrate any market falls as we are net buyers of units.
When we are retired or maybe within 5 years of retirement, we shouldn’t celebrate, as we are net sellers of units.
So just from a completely rational point of view, investors should hope that markets stagnant when they are young, and skyrocket before retirement.
But human nature isn’t as rational as it is emotional, so most people are afraid of stagnation and especially falls.
Look at the Nasdaq. It has been the index which has outperformed over the last 25–30 years and has even done well from 1999–2020.
And yet it was stagnant from 1999–2016 if you bought at the top, like the S&P500 was from 65–82.
You shouldn’t be afraid of a period of stagnation if you are young enough.
As an aside as well, a good investor should also have a bond index + international exposure.
Many markets have been struggling relative to the US for a long time now.
Look at the FTSE100. Has a great dividends of 4.5% and has been struggling against the US market for a long time. So it always makes sense to buy 3–4 indexes and rebalance.
I don’t know is the short answer. I suspect it won’t though. Stagnant or modest falls are more likely.
People often forget something about the 2008–2020. Apart from a few “success stories” like London, NYC and other big cities, many developed countries have faced a period of stagnating or real house prices.
Now sure prices might have gone up compared to 2010 or 2015, but adjusted to inflation they have stayed stagnant or fallen.
The UK is a great example of that. In 2007 the average UK house price according to the Nationwide survey was 183,000. Now it is 215,000.
That is just over 1% per year compounded for 13 years – less than inflation as per the graph below:
Likewise, the US hasn’t had a lot of growth adjusted for inflation:
There has only been big rises in certain specific cities or places.
So I suspect if there is a big crash, it is more likely to happen in those specific cities or indeed countries which relied on foreign buyers (like New Zealand) which have had big increases in real house prices.
That is unless the economic crisis goes on for longer than expected.
If 15%30% unemployment lasts for longer than expected, then of course there could be a crash.
If it goes on for a relatively short period of time, I doubt it will create a huge crash.
If you are just using real estate as a home and not as an investment, it shouldn’t really matter if there is a crash or not.
The issue comes when people get into negative equity and it is sustained.
A short-term big crash, followed by a recovery, isn’t a big deal for many homeowners.