How can millennials accumulate money when money markets and bonds are at 1%?

In this blog I will list some of my top Quora answers for the last few days. 

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How can millennials accumulate money when money markets and bonds are at 1%?

Cash and bonds, and cash equivalents like money market funds, aren’t paying much as you say.

Although it isn’t true that all government bonds are paying 1%. Some are paying more, but your point is still correct.

The landscape has changed since 2008. 2020 and coronavirus just added to an existing trend of lower rates.

Before 2008, people could make inflation +1%, 2% or more in the bank.

In the UK, interest rates were briefly 5%-6% before the crash, when inflation was at 2%.

That is inflation +3% or +4%, which was much higher than the historical inflation +1% or +2%.

Cash has always lost to stock markets and some other assets long-term, but people didn’t have to make the choice to lose money to inflation before 2008.

This has been part of a longer-term trend. In the 1970s and 1980s, real interest rates were even higher:

So the bottom line is historically stocks have given inflation +6.5% in terms of US markets, and inflation +4%-5% in the case of many other major markets, adjusted for dividends being reinvested, and cash used to give inflation +2%.

Since 2008, QE and 0% rates, that difference has increased a lot.

I expect in the next 5, 10 and especially 20 years, we will see the difference stay wider than 4%-5% per year.

Will stocks outperform cash every year? No. There will be years when stock indexes fall.

However, long-term, they will not only probably outperform cash in the way that they have always done, but outperform to a much greater extent.

The only way I foresee that situation changing is if interest rates shoot up.

In 2000, the dynamics were different. People remember that p/e ratios were much more overvalued than at any time in recent history, but they forget that interest rates were higher and bonds paid 6%.

That was one reason why US Stocks had a “lost decade”. Putting it in crude terms, people didn’t have to search for real yields.

They could beat inflation with cash in the bank, and especially beat it with bonds. That environment doesn’t exist now.

Of course though, the sensible long-term investor doesn’t change their strategy.

Whether in 1980, 1990, 2000, 2010 or 2020, some fundamentals stay the same.

It is best to invest in stock markets when you are young, even be 90%-100% invested in them.

Over time, increase your government bond allocation, as you approach retirement.

So the situation for millennials isn’t that different to when older people were young.

Stock indexes will likely beat bonds and cash long-term, but they are less volatile.

Therefore, change your asset allocation as you age. Don’t worry about the volatility.

Look at this year. Incredible volatility but somebody who bought on January 1 was up.

Even if markets had taken 2, 3, 5 or 10 years to recover from coronavirus, which they didn’t, that wouldn’t have been a big deal.

Just be long-term and you will be fine.Time is one of the few free lunches in investing.

More volatile assets, like markets, aren’t more dangerous if you hold them for decades as the graph below show:

Bonds just lower the volatility:

How do some people get out of poverty while others stay in it?

There are some commonalities I have observed. The main ones are:

  1. Starting early enough. It is much more difficult to get out of poverty if you are 45 and have always been in poverty, compared to if you are 22 and have came from a poor family. When you are young enough, you can take calculated and sensible risks. Let’s give a simple example. If you are 25 and earning minimum wage, it makes sense to get paid on results with a job that also pays minimum wage but is mainly commission-based. It might even make sense to get paid fully on results and try your own projects if you don’t have kids. What’s the worst that can happen? You fail, and go back to where you were. That get’s harder with age, but it isn’t impossible at any age.
  2. Persistence and perseverance – it can take a full decade to fully change your financial situation. Sometimes less and sometimes more. People that never give up, and try many different things, persistently, are more likely to achieve.
  3. People who have a positive attitude to money making – those people that blame “the rich”, and others for their problems (politicians, immigrants and whoever else) are much less likely to change their situation compared to somebody who actually gets off their ass and takes action + personal responsibility. It makes no sense, logically, to try to control things that are outside your control. So waiting 4 years for your favourite politician to get elected as leader, who will magically make the world better, isn’t sensible. Moreover, it is incredible how many people blame “the rich” but want to get rich themselves. There are also tones of people who blame Amazon and Bezos but still use them! Change starts by looking in the mirror and taking action over the long-term, and not giving up when there are roadblocks. I have noticed from my year group from university, there is a huge commonality which didn’t show up at first, but did after 7–10 years+. Namely, those people that were never “anti-money” or “anti-capitalist” tended to do better than those people that were.
  4. Making good choices – small, even tiny, daily choices compound. Almost like if you want to lose weight, those few extra calories can make a hug difference long-term. Choices like investing small sums for decades, as opposed to saving, and using time wisely, don’t make a big difference over 5 or 10 years. Over a lifetime it is huge! It is the difference between a $1m, Euro or Pound pot and $0 as per the graph below. I personally know several people on lower-middle and middle-incomes who are wealthy, and some high earners who are broke after overspending and divorce bills. So stories like this which one of my followers told me about yesterday after I reported another similar case (A janitor secretly amassed an $8 million fortune and left most of it to his library and hospital) aren’t as uncommon as people think, as books like the Millionaire Next Door have showed. In a developed country at least, it is possible to get wealthy without a high income, by making good choices and sticking to them for 40–50 years.

Also worth mentioning are:

  1. Those people that took extraordinary choices such as emigrating, or investing tiny amounts from a very young age, are more likely to change their situation
  2. Keeping away from toxic people and spending time with others who are successful can be key. One very sensible youngster in London went to an area which is known as wealthy. He knocked on each door and asked people if they wouldn’t mind sharing tips about how they got to where they were. That might be an extreme action, but these days online there is loads of good free resources.
  3. Delay “boxing yourself in” with kids and big mortgages too soon
  4. Even if you have a day job, focus on not just selling your time for money. Focus on getting paid on performance and/or assets. You might need a transition period, whereby you have your day job and work on projects after hours. What you do from 18:00-midnight are key.
  5. Don’t be constrained by norms (societal norms, business norms in your industry etc).
  6. Play the numbers game. If something was easy, then everybody would do it. You might need to try 50 ideas for 1 to work.
  7. Use technology to your advantage where you can. I am not just speaking about extreme cases like YouTubers earning $30M. I am speaking in general.

I am a 21-year-old female. How can I start investing? Is this offer by Charles Schwab (micro-investing, fractal trades) worth it or pointless?

In terms of how you can start investing, the process is usually simple.

You need

  1. To find a broker or advisor
  2. Submit the forms on your phone, by email or whatever is requested. These forms are usually your proof of ID, address and an application form
  3. Fund the account
  4. Invest

The only times this is complicated is if there is an extreme situation, like a person has a criminal records or they are living in a US sanctioned country.

In terms of the Charles Schwab offer, it seems legitimate. They aren’t a bad broker if you are American, or a non-American living in America.

However, for the majority of investors, they don’t need to complicate things with fractional shares and other such things.

All they need to do is:

  • Buy and hold indexes, including a bond index, for decades
  • Reinvest the dividends
  • Rebalance once a year.
  • There is no need to hold individual positions or do something too complex.

Sounds simple but many people struggle with that, and often panic during moments like the 2008 and 2020 crashes.

Many books have been written about this, including the one below:

So do it yourself (DIY) investing is fine for people who have balls of steal and know what they are doing, but I have ran out of the number of people who have reached out to me after March.

The commonality is they realise that DIY investing is (emotionally) easier said than done.

Often they panic sold, and took a loss, typically after reading fear-mongering media articles.

They then regret it after markets inevitably recover and hit record highs, as they always have done historically.

At 21 though, you are young enough learn the investing basics, and understand whether or not you can emotionally deal with the highs and lows of the market.

In comparison, plenty of older people are “once bitten twice shy” so either decide (foolishly) never to invest again after they panic sold, or they reach out to an advisor for help.

Is property investment a good investment in terms of not losing your initial purchase price, or can you lose it all?

It is highly unlikely that you will “lose it all” in property, meaning an 100% loss

The only way that can happen is if you buy a development, the development isn’t built so you don’t have capital value increases or tenants.

Or you build an already built house, and you can sell it, plus you can’t find tenants. Very unlikely.

What is more likely is you can’t sell your house. In the UK there was a scandal a few years ago.

It was called the Grenfell Tower scandal:

To cut a long story short, many people, most poor, lost their lives after a fire that was blamed on cladding.

How did the government react? They regulated. What was the affect of those regulations?

Unexpected consequences. Now millions of people can’t sell their houses in the UK due to “cladding issues”.

It has become such a big issue that one of the biggest shows in the UK, BBC Newsnight, produced a show about it, which is affecting 600,000 people.

The point is housing is an illiquid asset that can’t be sold easily. That means if government policy changes, it isn’t easy to sell.

Something which affected much more than 600,000 people was tax changes in the UK.

The UK’s system used to be like the US, in that property used to be tax-advantageous.

That changed and now many buy to let landlords want out. The ones that want in often don’t know how much has changed since the “heyday” of the 90s and 2000s.

I am not saying property is always a bad investment. It can be an excellent investment in certain conditions.

Merely it has more risks than people assume. You can “lose” with property.

That’s why you often need to be a truly professional property investor to make it big long-term.

You often need to be on top of these changes in government policy.

It is more similar to running your own business in some ways than an investment.

Why do you really need $8 million saved up for retirement?

For most people the answer is absolutely not. Based on the 4% rule of retirement, you would only need $8m if you are planning on spending $320,000 a year.

The graph from Cape Fire Finance explains more:

And of course, that is assuming you don’t have extra income coming in from real estate, online activities or somewhere else.

What is true though is some people significantly underestimate how much they need.

There are plenty of executives out there who haven’t planned early for retirement.

If they have gotten used to spending a lot of money, which can be the case for a percentage of high-income earners but not all, it isn’t easy to change habits in retirement.

So if you are used to be relatively frugal, retiring tends to be much easier, regardless of your income.

In comparison, if somebody has gotten used to spending whatever is coming in, retiring gets harder, as they need a 100% replacement rate, unless they can suddenly change their habits in retirement.

It is in these cases where people need a much higher amount than expected in retirement.

Of course, there are always ways to do it much cheaper, such as the legions of people who emigrate to retire overseas, or move to a cheaper place inside their own country.

That can completely change the dynamics, as can finding a small side income online, or working part-time.

It all depends on personal circumstances, and what decisions people are willing to make in retirement.

You could have person A who can retire tomorrow because they have found a way to make income sustainable online, and person B who needs to replace 100% of their income to retire due to their spending habits.

The only time when you might need $8m for sure is if it is literally “saved up” in cash.

$8m invested is very different to $8m saved up in a period of 0% interest rates.

Inflation + spending could destroy that pot if somebody wants to retire at 60.

Such a person could live for 35–45 years, or longer the way medical technology is going.

Getting 0%-1% when inflation is running at 2%-3% will compound over that amount of time.

And that is another thing too remember. Planning a 10 year retirement is very different to a potential 30–40 year one.

Can you generate a permanent source of income from share market?

Yes you can. However, the mistake people typically make is trying to run before they can walk.

There is a lot of misleading information online, which implies that somebody can live off a $100,000 portfolio forever, or even $10,000.

If you have $100,000, or even $1,000, it is true that you can easily make dividends.

The FTSE100 index pays 4.5%+ dividends. Some high dividend stocks and ETFs pay more.

So just having a permanent income is easy. What is difficult is having a big enough income to live off it.

Based on factors like historical returns, inflation and dividends, countless academic studies have shown that it is only safe to withdraw 4% per year.

So that is $4,000 a year from $100,000, $40,000 from $1m and $400,000 from $10m.

So the best option for most people is to have a two stage process:

  1. Accumulate first. Reinvest dividends. It makes a big difference as per the graphs below. Keep adding money to the pot as well.

2. Then withdraw and take a permanent income when you need the money.

In plenty of countries the majority of the retried population are depending on income from the stock market to completely, or partially, to fund their retirement.

This includes people who aren’t even aware that their pensions are linked to markets!

So it is more than possible and the norm in many countries. It just takes patience to build up the capital, or a lot of capital to begin with.

That’s why investing small amounts of money at an early age is a good idea.

It will add up to enough money needed to take an income from it.

What Financial advice do you have for someone in 20s who wishes to own a house?

The biggest pieces of advice I would give are:

  1. Make sure you are wanting to do it for the right reasons. Some people want to do it because they think property can only go up, peer pressure or because they have heard things like “renting is dead money”. It isn’t. Depending on your city and country, renting can be cheaper or more expensive depending on your situation.
  2. Factor in all aspects when it comes to rent vs buy, including time, maintenance costs etc. For example, if you are buying an old house, you might have to spend thousands or more renovating it every few years.
  3. Don’t “go low when renting and high when buying”. This is one of the lessor known factors that isn’t mentioned in the renting vs buying debate. Because many people think you can’t lose with property, and values will only rise above inflation forever, many people spend as much as possible on buying. Buy the least property for your needs, not the most, unless you can really afford it.
  4. Interest rates are low now, and look like they could stay low forever. Don’t automatically assume they will stay that way for 20–30 years like they have in Japan. I do think there is a 30–50%+ chance that they will. However, a good rule of thumb is to search for a house. Check the mortgage rate. Then ask yourself a simple question. If interest rates doubled, could I afford this house? If the answer is no, you can’t really afford it and are taking a big risk.
  5. Stick to your home market to start with. Some people try to run before they can walk, and buy overseas first.
  6. Even if you can afford to pay in cash, do the maths, in the same way that you would for rent vs buying. Buying on mortgage, due to leverage, can be cheaper long-term.
  7. Make sure your income is relatively secure, or if not, you are being very conservative with your purchase. The last thing you need is to worry about servicing a mortgage.

So essentially the decision should be made on the maths, and logic, and not on emotion.

Also, as a final comment, whilst the stock market is almost impossible to time and isn’t usually linked to the economy, the housing market does tend to fall during recessions.

Look at Dubai now. Prices are at 2010 levels. After 2008–2009, prices in the UK (adjusted for inflation) never recovered.

They did in nominal terms, and hit nominal highs, but not in real terms outside of 1–2 big cities.

So I am not sure where you are living now, but some big bargains could be about to come up, before there is full economic recovery.

If you enjoyed this article then take a look at our review of the Money Advice Service where we critique the benefits and drawbacks of this UK based public organization.

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