I often write on Quora.com, where I am the most viewed writer on financial matters, with over 266.8 million views in recent years.
In the answers below I focused on the following topics and issues:
- What is the best advice somebody can receive before they start investing in the stock market? Should we only focus on technical knowledge, or is emotions also a vital component of investing success?
- How are risk and return related? Or perhaps it is a myth, when we consider that some investments just give you more risk, whilst others can perform well with reasonable levels of risk? I look at all the factors, including how long you want to invest for, which will influence the risk you are taking.
- What is the difference between very wealthy people and those who are merely wealthy?
- What kinds of people should we associate with, and which kinds of people are best avoided? Why is who you associate with important for your future wealth, and for that matter, mental health?
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How are risk and return related?
It is related in many situations. Private equity can be very risky, and it is one of the few asset classes which has beaten the public markets, even though a few winners have distorted the average.
Charts like this are a bit misleading though, as some extreme bets distort the averages, and only looks at one time period.
In some situations, however, risk and return aren’t related at all. Here are two examples:
1. Sometimes you are just taking more risk, without higher returns.
Emerging markets are, in general, riskier than developed stock markets.
That isn’t because they are more volatile. It is a mistake to assume that more volatility automatically means that something is riskier.
Emerging markets are just more prone to political shocks, and there are less institutional investors.
In markets like the S&P500, 80%-90% of the money is run by institutions such as hedge funds, banks etc.
Therefore, if markets fall hard, and look incredibly undervalued, that won’t be the case for long most likely.
Despite this higher risk, even long-term investors in emerging markets have made less than developed markets, and especially US markets.
2. Sometimes higher returns are possible for lower risk
Cash pays 0% and isn’t risk-free. In fact, as Ray Dalio and others have said, cash can even be seen as the riskiest investment.
Not if it is just a small amount for emergencies, but if you are holding cash for yeas, the inflation and currency risks are huge.
Some types of government bonds also pay close to 0% these days.
Stocks are riskier than both cash and bonds if you hold them for days, weeks, months or even a few years.
If you hold stocks for 5 years+, it isn’t that risky. If you hold an entire stock market index for decades, it is actually less risky than many types of bonds.
Your chances of being down, moreover, is very small, if you are long-term:
This isn’t just the case with stock markets. The same can be true in business.
In general, more risks equals higher chances of gain and losses.
In some situations, however, doing nothing is riskier than doing something.
Starting your own business is usually riskier than working for somebody else.
That isn’t the case if you have amassed a lot of experience and realize your position isn’t tenable.
What is the best advice someone can give me before investing in the share market?
The biggest suggestion I can give is either know what you are doing, or outsource it to a firm.
Most people invest for at least one of these reasons
- They “like” a personality like Elon Musk, Buffett or whatever
- They heard online, or from friends, that such and such stock is a good idea
- They have fear or missing out (FOMO), or they panic sell during the worst of a crisis such as 2008 or 2020.
- They follow trends
- Too much time is spent watching sensationalist news headlines.
- They focus on past performance alone
For the last point, consider this, Cathy’s Wood’s ETFs are up by over 1000% in total, with some doing 150%+ last year alone:
Yet the average investor in her funds has only received 5% returns! Yes 5%!
What could explain this? People got in when it was fashionable. Now it is down for the year, and many people are getting in, taking the loss.
The ETFs might recover, but the point holds. That is one of the reasons for the following results:
This leads me to my final point – controlling your emotions is key.
Great investment knowledge + emotional control = more chance of long-term success
Outsourcing to a decent firm + emotional control = more chance of long-term success.
The best investment knowledge in the world without emotional control = you could lose money despite the fact that markets go up (big time) in the long-term.
In the same way there are many fat or alcoholic doctors, there are plenty of people with great investing knowledge who still panic sell or get too emotional with their own money.
Studies show that at least 35% of DIY investors panic sold between February and May 2020, with many investors also existing the market pulling the 2000–2002 bear market, when stocks fell.
Many people buy high and sell low, even if they pledge they won’t be “that person” before they start investing.
In all honestly, you never know how you will deal with your first crash, until it actually happens in real life, and we hear the old adage that “this time is different”, or “markets won’t recover this time unlike the past”.
So, focus on getting both sides of the equation right.
What are the differences between the ultra-wealthy and ordinary millionaires?
Firstly, there are fewer ultra-wealthy people in the world compared to everyday millionaires.
You probably know some “secret” millionaires in your own network.
Teachers, accountants, secretaries etc. People who have patiently amassed fortunes on regular salaries.
Often these people have became wealthy by making two or three relatively small decisions which have compounded over time.
For example, living below your means and investing sensibly for decades can make you wealthy by middle-age or before.
Living below your means , investing sensibly for decades and reinvesting an inheritance or bonus can make you very wealthy by middle-age or before.
In comparison, there aren’t that many ultra-wealthy people in the world.
There are estimated to be just 2,755 billionaires in the world. Some entire countries have only a few:
That is because you often need the following things:
- A scalable idea. Increasing a business and scaling it to such an extent that you don’t need to work harder to earn more, are two different things.
- Some luck/good fortune. Bill Gates, Mark Cuban and others have admitted that to be super-wealthy, does require some luck compared to just being wealthy. Let’s face it, if we were born during the period of the World War or the Stone Ages, many of the wealthiest people of today wouldn’t be as wealthy. For one thing, half would have been dead before they got wealthy, when you look at the average age of death.
- High intelligence, huge risk taking ability or some other defining feature.
Of course, if you include people who are worth say $30m+, you do have a bigger pool than 2,700 people.
I guess in terms of the main differences, many everyday millionaires still live pay cheque to pay cheque.
Over time, they can merely quit the day job/day business.
Very wealthy people are more likely to not rely on one or even two incomes.
The mentality is also likely to be different. Many ultra wealthy people aren’t 100% focused on money.
Often they started out trying to solve a problem, and are also willing to do extraordinary things.
The average everyday millionaire isn’t willing to work like Elon Musk, or take the same number of risks for that matter.
Risk is a key one. Most people are paranoid of taking any risks. Most wealthy people will take calculated risks.
Many super wealthy people are willing to take even bigger risks.
What kind of people are best to surround yourself with?
Consider this. If you fill your body with excessive amounts of junk food, nicotine and alcohol, you are more likely to get sick.
The same is often true in terms of our mental health and outcomes in life.
If we put crap in, we are more likely to get crap out.
For example, if you spend your time watching negative content, and surrounding yourself with toxic people, we are more likely to be unhealthy, broke etc.
Study after study has shown that even spending a few minutes a day reading negative Twitter comments can make a huge difference to our way of thinking.
Even people who are thick-skinned get influenced in a subconscious way.
However, if we surround ourselves with people who are positive, and want us to succeed, then we are more likely to be healthy (mentally), wealthy and/or achieve whatever we want in life.
I have learned the types of people who are worth their weight in gold are
- People who you want to be like. Want to get healthy? Spend more time with healthy people. Want to get wealthy? Spend more time with wealthy people
- Those who have an abundance mindset. People who think that your gain is their loss, are more likely to try to bring you down
- Especially if you are just out of college/university, those who want to mentor people.
- People who encourage you to be the best. Think about elite sports teams. Most members want people on the team to be the best in the world. The competition makes everybody better. The same is true in business. It is better to work for somebody who is happy to see you become better than them, compared to those who hog the limelight. Sensible business owners, with growth mindsets, know that if they are the least smart person in the room, they will make more money than being the smartest person in the room.
- Those you can learn from, and have a long term relationship with
- People who don’t complain a lot, and take personal responsibility
- Those who adapt to changing times, and don’t think that past success means they are still a know it all.
- Those who are positive but are still wiling to put in the work. Being positive and decisional isn’t good of course.
- If the focus is on execution rather than ideas, and the person has a track record.
- People who read a lot and focus on new ideas.
Here is also a good test. Think about all the people you know. Now imagine you will have a 15 minute phone call with them.
Which ones will make you feel more drained after the call than you were before, and which ones will energise you?
That is a good test and says a lot.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 266.8 million answers views on Quora.com and a widely sold book on Amazon
In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:
- Why does inflation make holding bonds for the long run riskier than owning stocks?
- What is the saddest financial fact about America and some other countries like the UK?
- Will Bill Gates’ divorce result in a falling Microsoft share price?
- How do you turn $1million into $2million? How long do you need to wait?
- Could target date retirement funds increase your risk and lower your return?
To read more click on the link below.