I often write on Quora.com, where I am the most viewed writer on financial matters, with over 466.9 million views in recent years.
In the answers below I focused on the following topics and issues:
- Experts say the that the pound will soon go below the dollar as we have recently been seeing the continuous decline in the GBP. Should I start saving in USD instead?
- What should you do as an investor to prepare for a recession?
- How many millionaires do you know who have become wealthy by investing in savings accounts?
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Some of the links and videos referred to might only be available on the original answers.
Source for all answers – Adam Fayed’s Quora page.
Experts say that the UK economy is dwindling and that the pound will soon go below the dollar as we have recently been seeing the continuous decline in the GBP. Should I start saving in USD instead?
The Pound Sterling, Euro, Japanese Yen and many other currencies are plummeting against the USD.
As you say, this has resulted in many people predicting that the GBP will fall to 0.90 or even 0.85 against the USD, after it hit 1:03 recently.
This depreciation has been going on for years:
Nobody can predict, with certainty, where currencies will go. What we do know is that keeping too much money in cash is risky.
If you invest in an asset and it falls, it isn’t the end of the world. Even if somebody purchased say the S&P500 one day before a huge crash, you just need to wait a few years for a recovery.
With cash and currencies, you may never get that recovery. Will the Pound ever recover to 2:1 against the USD – the rate it hit in 2007? Maybe, but there is a possibility it won’t.
Having said that, that doesn’t mean you need to directly buy USD.
In the video below I look at VOO vs VUSA. VOO = investing in the S&P500 in USD, and VUSA is investing in the S&P500 in GBP.
The returns are pretty much identical, because you are investing in the underlying asset and not the currency.
So, if you convert to USD and invest, your returns won’t be any different to if you invest in GBP into international markets.
In fact, they will be marginally lower, as you will need to pay a currency conversion fee. Therefore, if you want to hedge against currency falls, it is better to just invest in Pounds, but in the international markets.
The exception is for British expats living overseas, who should consider USD-based investing.
What should you do as an investor to prepare for a recession?
In 4–5 steps.
Firstly, Stop listening to the media. Remember that the media has called about ten of the last two recessions.
So, don’t think it is easy to call when a recession will start and end. This quote from the Forbes owner sums it up:
If you start making decisions on long-term fundamentals, and stop caring about short-term risks and volatility, the better your long-term investing outcomes are likely to be.
Then, have a sensible amount of cash. Most people do need three to six months of emergency cash in case of emergencies, but having too much savings doesn’t make sense.
Cash in the bank loses to inflation and other assets long-term. If we extended the graph below to over fifty years, the results would be even more extreme:
Cash is just less volatile which makes people feel more comfortable, but that doesn’t mean it is safer. The collapse and depreciation of various currencies against the USD in recent times illustrates this point.
Then you have the issue about how you are using cash to begin with. A recession is a good time to really analyze some of the silly purchases we all make.
One of my friends was recently telling me that he only realized how much he was spending on subscriptions after he really analyzed his different bank accounts recently.
Another thing he was overspending on was interest payments. Credit cards can cost 18% or more per annum.
Even most of the best performing long-term investments in the world don’t consistently generate that for decades.
Therefore, paying off any high-interest bearing credit card debt makes sense, before you start investing.
That doesn’t mean every debt is bad. Certain kinds of debts for business investment can make a lot of sense for business owners.
It is more likely to make sense when everybody else, in other words competitors, are feeling pessimistic.
This brings us back to one of Warren Buffett’s famous quotes:
Look at the 2020 recession. In February and March, stocks crashed. Costs for digital adverts online also plummeted.
Those that got in benefited at discounted prices. People who decided to “wait and see” didn’t see the rebound.
Remember the 2008 recession created the most millionaires in history than in any other five-year period. Historically, recessions create more multi-millionaires than “normal” times.
That is because change creates opportunity. So, focus on the opportunity that a recession brings, and not just the threat.
Is a net worth of 1.5 million good?
It depends on:
- Where you live
- Your cost of living
- Your age
- How liquid the money is
Consider this simple example. Let’s say you have $1.5m in the bottom half of the world’s cheapest countries, and you are 30 or 40.
In which case, with a bit of planning, you could live off your investments forever, without needing to be ultra frugal.
That kind of portfolio could generate an income which is three, four or even six times higher than the average income for those around you, and give you a good standard of life.
In comparison, if you are living in one of the most expensive parts of the US, $1.5m won’t last you in retirement, if you don’t have a pension or other assets.
This graphic, which was made a few years ago now, shows that $1m might last you for 17 years or less in some US states:
Even internally in our own countries, there are massive differences in terms of cost of living.
So, just as we have risk-adjusted returns in investing, we should factor in “age and location adjusted” factors when looking at net worth.
Then there is liquidity. Having $1.5m in say ETFs or funds, isn’t the same thing as having $1.5m in a house or especially a private business.
In some parts of the world, it can take months or even years to sell a house, and getting a buyer for a private business can take longer.
This is one reason why liquid net worth is often more important than pure net worth, especially when factoring in risk.
How easily your assets can be turned into cash is an important variable. If we looked at things in that way, even lists such as Forbes would look completely different.
That doesn’t mean that all your assets need to be in liquid, or relatively liquid, instruments. Merely, it shows the importance of liquidity when reducing risk.
I have met some people with net worths of over $10m, $20m, who have struggled if they have an emergency, due to liquidity.
Is China’s stock market better than the USA?
Better in terms of long-term performance? Then the answer is no.
Superior in terms of risk-adjusted returns? Again the answer is no. Investors in the Shanghai and Shenzhen indexes have taken on more risk, and received lower returns:
Going forward as well, you have the issues of:
- Too much government regulation of the private sector in China (political risk)
- A demographic issue in China, without the hope that migration will come to the rescue
- A property bubble.
- Fewer institutional investors. The Mainland China market is still dominated by retail investors, and hence why it is more volatile, without giving a higher return
- Many of the best Chinese stocks IPO in the US or Europe, and countless of the largest firms, for example Apple, have grown due to China and India. In other words, you can still gain the benefits of global growth by investing in the S&P500. The same thing could be true for Africa in the future. It could become the number one growth engine in the world. That doesn’t mean its local stock markets will outperform.
- The last country having difficulty coming out of zero-Covid, even if that should be sorted out by 2023.
The only way that the Chinese stock market is “better” than the US, is valuations. The market has been so depressed, for so long, that it is due a correction.
Just as the Chinese stock market did well in the 1990s and until 2006 in the 2000s, there will surely be a bounce – another great decade some day where the Chinese market outperforms most others.
Remember though, markets aren’t stupid even if they can be irrational at times. Chinese stocks have been cheaper than American ones for over a decade because the market is pricing in the risk.
So, if you have MSCI World in your portfolio, I wouldn’t worry about its allocation to China, as it isn’t a majority position.
How many millionaires do you know who have become wealthy by investing in savings accounts?
This might amaze some people.
But the answer is……literally none.
I know the following wealthy people
- Those who got wealthy through starting a business or get-rich-slowly investing in the stock market and other assets. This is the majority.
- I know others who inherited money and managed to keep hold of it
- And yes I know some wealthy people who have a portion, usually a small portion of their total wealth, held in savings accounts.
Yet I don’t know any who got wealthy by having money in savings accounts. I haven’t seen any academic or anecdotal evidence that has gone against that.
Those who have studied large samples of the wealthy have shown a similar commonality.
That is because the maths doesn’t work out. Interest rates have been below inflation for a decade and a half.
Even when they were above inflation, they paid 2% per year above the inflation rate.
Therefore, even if you compound that over decades, it won’t make you wealthy.
You can see how cash has historically performed. T-bills have done 0.8% per year, on average, above inflation:
That compares poorly to 6.5% per year above inflation for stocks. Even bonds have done better. Cash is just less volatile, which doesn’t mean it is less risky.
When interest rates are above inflation, which I am sure they will be again sometime in the future, it can make sense to allocate a portion of a portfolio to cash, especially if the currency in question isn’t too risky.
For business owners, holding cash for various investments and reasons can also make sense, but not forever.
Cash needs to be put to work, otherwise it gets eroded due to inflation, and the risks of currency falls are huge.
Cashflow is what is important, not cash.
That is one reason very prominent investors such as Ray Dalio told CNBC that cash is trash – it doesn’t pay much and has loads of hidden risks:
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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
