I often write on Quora.com, where I am the most viewed writer on financial matters, with over 314.1 million views in recent years.
In the answers below I focused on the following topics and issues:
- How can you beat S&P 500 performance? Is it possible considering how efficient the index is? I look at various strategies people can use. More important, I ask another question – how can somebody beat the average person who invests in the S&P500?
- Why do many wealthy people diversify away from property, apart from aspects such as liquidity.
- Does being rich make people happier, or doesn’t it make much of a difference? I speak about some important studies which have been that, that have showed how money can at least help make us happier and less anxious.
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It isn’t easy on a risk-adjusted basis.
What you can do is the following:
- Take higher risks. Invest more in a small-caps index or the Nasdaq. They won’t always outperform but might do over a career.
Here are some comparisons:
- Focus on the negative rather than the positive. What do I mean by that?
Well, most people try to beat the S&P500 by picking the best stocks.
This is difficult for the reasons I have alluded to in other answers.
At least it is difficult to consistently get it right over a 40 or 50 year investment time horizon, from your 20s until retirement.
Even one terrible period could drag down your average returns below the index.
However, you could look for ETFs which simply track the index by taking away some players.
Buffett once commented and how difficult it is to beat indexes, but pointed out that if he was starting out again, he would construct a smaller index.
Let’s say invest in 20 or 25 of the firms in the Dow. Or, 450 of the 500 firms in the S&P500.
In reality, though, most people don’t have the skills to do this, and even if they do, the marginal over-performance wouldn’t be worth the time.
What is much easier is beating the average investor’s performance in the S&P500.
Statistics show that the average do-it-yourself investor makes at least 2% less per year than the index!
The reason is they buy when it is high, and sell when it is low.
So, even somebody who has invested in the S&P500 for 30 years, was more likely to sell some in 2008, and during Covid, or at least stop adding more.
It is easy to beat such people. Be robotic. Don’t let emotions get the better of you.
After all, one of the largest studies ever done by Fidelity, one of the biggest brokers in the US, found that the best performing accounts were from people who are dead or forget about the account!
I have lost count of the number of people who have told me that their best performing accounts were ones they forgot about for decades.
Typically, those are accounts that parents set up, or ones that are so small that we forget about them.
This especially seems to be the case, ironically for more knowledgable and intelligent people, including those in finance.
More knowledgable people tend to want to be active and engage in “analysis paralysis” – “is now a good time to invest” blah blah.
I will give you a great example of the last point,. Studies show that investors who invest in Vanguard’s Total Retirement Funds, do better than those who invest in the main ETFs.
The total retirement funds seek to increase the number of government bonds in the fund as an investor gets older.
So, if you buy the Vanguard Target Retirement Fund 2050, it will have a different asset allocation to the So, if you buy the Vanguard Target Retirement Fund 2035.
These funds tend to be more conservative than going fully in one index like the S&P500 and cost about 0.20% more.
The performance is worse than the S&P500 (as per the chart below), but the risk-adjusted return is similar, because there is less risk by definition, because the funds are adjusted over time.
Get this though. The average investor in these funds actually performs slightly better than somebody 100% in the S&P500, despite the fact that the S&P500 has done better as illustrated above.
I think the reason is simple. People who invest in these total retirement funds keep it simple.
They are more likely to invest or forget, or they are going in on the advice of advisors.
In comparison, many smart people who engage in analysis paralysis, look at the slightly higher fees and think “I can save here”, after looking at an excel sheet.
Those people, of course, are the same kinds of people who tend to overthink everything.
Therefore, they are less likely to invest during 2008–2009 and other similar periods, as they consume more news.
The point is, doing less can be more profitable.
There are a number of things to consider here. Firstly, I guess you have heard the following expression:
Rich people’s problems
This definitely applies to real estate. Jordon Peterson tells the story here of the couple with six houses:
More houses, especially bigger houses, equals:
- More bills to pay
- Working out the taxes due
- Increased leaks
- Sometimes major renovations if it is an old house like a cottage.
- Increased complexity if you want to go the multi-jurisdiction route. In other words, having a holiday home abroad and one in another state if you live in a federal system
- If you want to avoid most of the above troubles, you need to outsource it to a real estate agency. That means finding a trustable and reliable firm, or usually firms if you go down the multi-jurisdiction route.
All of the above also decreased your net returns, especially adjusted for time and hassles.
In comparison, people can have a diversified, liquid, portable of ETFs and other investments which can be managed with a click of the button.
This liquid portfolio can include real estate investment trusts (REITs).
Managing a $10m account isn’t that much more hassle than a $10,000 one.
Now sure, in the first instance there might be more compliance questions due to anti-money laundering requirements.
Longer-term, it isn’t much more of a hassle, and you have liquidity.
Therefore, if something happens, you can sell out. With real estate, unless you go down the REITs route, it is illiquid.
It isn’t always easy to sell, especially if you own a big house. It is easier to sell a 500k family house than a $10m place.
I read on the news that former James Bond star Pierce Brosnan is struggling to sell his place.
I know many people with much more modest homes which can’t easily be sold.
This is especially a problem in some Asian countries where people don’t like “second home homes” that much and prefer brand new places.
Added to that, the return on real estate has often been lower than the S&P500, adjusted for costs and time.
There are good reasons to buy real estate, such as diversification, or if somebody is a true professional real estate investor.
Yet putting most of one’s assets in illiquid assets like houses or a primary business can be a key mistake.
We have seen that during Covid as well. So many previous successful business owners have struggled as they put all their eggs in one illiquid basket.
Warwick University did an interesting study:
They found that people are happier when they are doing better a little bit better than their neighbors and people they are close to.
The person earning $90,000, who is surrounded by people typically earning $70,000, will often be happier than the person earning $500,000, but surrounded by people earning millions.
Therefore, if you want to be happier, often it makes sense to live in an area below your financial capabilities and not just “trade up” when it comes to property.
Beyond that, money can help to make people happier, if they use the cash in the right way.
For most people that is:
- Spending on experiences, especially novel and new ones, versus on things which get old. That new car or iPhone gets old fast. In comparison, most of us remember the first holiday with our kids or spouses.
- Giving to others. Countless studies have shown that those who give to good causes have lower levels of stress and anxiety, and this can be shown by comparing blood results and other measures.
- Focusing on security as much as things. The sense of being independently wealthy, and able to take a year off or retire early, is more relaxing than always needing to work.
- Not comparing yourself with other people and the consumption habits they display. Also, not being pressurised by society to live up to a certain standard. Most wealthy people who still live in the same old house are happier than those who always buy a bigger place.
- Focusing on health and our relationships with people around us.
- Having some kind of balance in life, even if we work hard.
- Buying time in some cases. That could be outsourcing as a business owner or retiring early if you hate your job.
- Focusing on hobbies and what you actually enjoy, once wealth has been accumulated. For some this is work. For others, it might be something else.
In comparison, some people get more miserable as they earn more. Those people typically just care about what general society thinks.
The next Instagram picture, showing off, is more important than the actual experience.
When people say that money can’t buy happiness because numerous studies have shown that whilst money makes a big difference at the lower levels, it doesn’t seem to have an effect once people are comfortable and then become very wealthy.
That is partly true but isn’t the whole story. If people use money in the right way, it can make a difference but doesn’t buy happiness automatically.
Let’s put this another way, a lack of money indirectly causes many of life’s problems – more chance of divorce, death, and disability.
At least managing money well increases your odds of happiness, if you use it correctly.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 314.1 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:
- Are there any other stocks like Google (or for that matter Amazon) that just continuously go up? Or is that a myth in of itself, considering Google has regularly gone down in value during periods like 2008?
- What is the best financial decision I have ever made? I look at one umbrella term, taking calculated risks, which has helped me in many areas including business and investing.
- What are some good ways to pay off debt and start saving + investing? How can using cash, investing at the start of the month and not giving in to peer pressure help you in the long-term?
- How can people earn over $100,000 a year in the UK without having a degree, apart from starting a business or joining some trades? I discuss the various routes I have seen work, and how times have changed, since the days when “working your way up the corporate ladder” was tried and tested.
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