I often write on Quora.com, where I am the most viewed writer on financial matters, with over 445.7 million views in recent years.
In the answers below I focused on the following topics and issues:
- What habit can change one’s financial life positively?
- Why do people fear a market crash more than they have in years?
- Financial leverage, is debt good or bad?
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Source for all answers – Adam Fayed’s Quora page.
What habit can change one’s financial life positively?
There are many things I could mention.
One thing I have seen work, time and again, with people from all backgrounds, is taking small steps.
No matter how motivated you are, it is difficult to always maintain motivation. Human beings are hardwired to procrastinate, keep to old habits and delay.
Even very hard working people, who don’t struggle with motivation, can find it difficult to make changes, especially above a certain age.
Yet very few people struggle to remember to brush their teeth
Or put on the shoes in the morning
Or getting dressed
The reason is simple. These habits have became automatic. Making big changes, or too many changes, too quickly, can result in failure.
Often it is better to start slowly, with just one or two habits . This book explains it well – Mini Habits.
I think it was Woody Allen who said 80% of success is just showing up. It is often true.
So, take investing as an example. If people just open up account, even with a small amount of money, this is 80% of the battle.
Few people want to go back once an account is open, but many procrastinate thinking about it.
The same is true in business, losing weight or any domain.
Then, once you see some progress, it is easy to “get greedy”, and want to see big gains.
A lot of people who look big in the gym, just started out going for a short-time everyday, and then built up.
The same is true in business, investing and other financial matters.
Why do people fear a market crash more than they have in years?
They actually don’t for the most part.
People who think they do, often have short memories, or are young investors.
I remember:
- 2009 – plenty of people thought markets would dip even lower.
- 2010 when people were petrified about the markets going down again
- People were speaking about dead cat bounces!
- 2013-2015 – when people thought markets had gone up for too long
- 2016 – the fear about Trump getting elected
- 2018 – fear about a government shutdown and markets being too high for too long
- 2019 – more worries about the markets being up for too long
- 2020 – Covid and then worries about a disputed election
- 2021 – more worries about the markets being up for too long
- 2022 – Russia/Ukraine and many other things
Anybody who has been reading my answers for years would have seen me answering the same question, on the same identical worries, for years. The only difference is what event people are worried about.
The most ironic thing about it is, a market crash isn’t anything to worry about, for the vast majority of people.
Let’s speak about the two most extreme crashes in living history – 1929 and the 2000 Nasdaq crash.
The 1929 crash was the biggest ever. There was a 90% fall. Yet even somebody who bought as a lump sum in 1929, and held for 30 years, would have made 8.24% per year., adjusted for dividend reinvestment.
Somebody who bought in 1927, or for that matter would have added more money when the markets were so cheap in the 1930s, would have made more.
A more modern example is the Nasdaq. It fell 76% between 2000 and 2002, but somebody who bought at the top and sold last year, would have made a good profit.
And these are extreme examples. It isn’t realistic that you will buy, with one lump sum, right at the very top of the market. Most people are salaried or have a business so need to invest monthly or yearly anyway, on top of any lump sums.
Many people think these falls only benefit younger investor, but even many 55-year-olds will have 40-50 years left, where the accounts will need to be drawn down in retirement.
What is worrying about market crashes is when you have 100% in stocks, and you are close to retirement. That is a concern as you probably need to sell a portion of the stocks every year to fund your lifestyle. That shouldn’t happen though, because it makes sense to diversify before that point.
Ultimately, market corrections and crashes come with the territory. The S&P500 has down 11% per year, on average, since 1945, at least adjusted for dividend reinvestment, but it has fallen by 20%, 30% or 50% so many times.
The average investor shouldn’t be worried about crashes. They should be worried about worrying about these crashes, if they are likely to panic sell or do something silly.
Even those who don’t panic sell, or more likely to have a “wait and see” approach when markets start falling, and prefer adding more when everything is going well.
Financial leverage, is debt good or bad?
Leverage increase returns. The example below looks at real estate:
It also increases risks and the chances of losing big as well.
So, you need to be careful. Simple example. Let’s say you have a successful PR, consulting or law firm which is growing fast. Then a bad recession or other issue happens. An unlervaged firm can survive even if revenues fall 70%.
Now sure, they might need to make adjustments. Those could include laying off staff, cutting all kind of costs and closing down the office.
But they could survive. The founding partner could just run a small one, two or three-man band from his/her home, or a serviced office.
After all, many successful firms are lean these days, and don’t have physical office space.
In comparison, that leveraged firm made more on the upside, but could go broke on the downside.
Of course, there are ways to reduce this risk. Special purpose vehicles (SPVs) can be set up for specific purposes, like buy out, and shield the partner company.
This can allow firms, in some instances, to get loans and push the risk onto others, which isn’t seen as ethical by some, but can work out for the founders.
if the founders have $2m, and they invest that $2m, they can go broke. If they use $2 of other people’s money, they won’t go broke, unless they needed to put up collateral for the loans.
Either way though, leverage does increase risk.
The same is true for using margin/lombard loans in stocks, and mortgages in property. Of course, it pushes up returns. People wouldn’t be so crazy about property, as they are, if they weren’t able to leverage.
Yet, here, you have another problem, beyond the obvious risks like the possibility of increasing interest rates.
Namely, the risk is yourself. Human beings have a tendency to either get over-confident and complacent, or under-confident and fearful.
So, almost eveybody starts small when it comes to leverage, in much the same way that problem gamblers also are usually cautious at first.
If you take out a $50,000 Lombard loan on a $500,000 account, that isn’t a problem. The issue comes when greed gets in the way.
As leverage starts to work, people tend to take bigger and bigger risks, especially if the returns go on for decades.
I have ran out of the number of people I have met who lost it all, due to leverage, in the housing crisis. Some were even professional property developers.
Looking back, most admit they got too confident, as the good times rolled for too long.
¿Le duele la indecisión financiera?
Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
