I often write on Quora.com, where I am the most viewed writer on financial matters, with over 335.1 million views in recent years.
In the answers below I focused on the following topics and issues:
- How is it wise to save money when inflation is constantly lowering its value?
- What kind of things do startups waste their money on?
- Can using money to leverage gains ever make sense in the stock market?
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Source for all answers – Adam Fayed’s Quora page.
How is it wise to save money when inflation is constantly lowering its value?
Firstly, inflation only erodes money if the cash is under your mattress, or interest rates are below inflation.
Historically, the bank paid you more than the inflation rate. If so, there is nothing to worry about.
If inflation is running at 4% a year, and the bank is giving you 5%, then that isn’t an issue.
That isn’t the case now, and it hasn’t been like that since 2008, at least in most countries.
The bottom line is saving money doesn’t make sense for two reasons
- You will lose to inflation and other assets
Historically, some assets have always beaten cash long-term, so even if interest rates increase, cash in the bank won’t beat the markets.
If that wasn’t the case, the banks would be fools to give people interest on their savings.
2. You might as well buy future inflation
What I mean by this is that you can save money by buying things. For example, you could:
- Install solar panels, or house insulation, and get paid back within a few years in some cases
- Bulk purchasing goods on Amazon whenever you see a special offer. Let’s say you need Gillette shavers and suddenly there is 20% off, then buying them makes more sense than saving
- Getting a more fuel-efficient car, or home appliances, at least in some instances
The list could go on and on. Of course, we all need some cash for emergencies.
Cash isn’t a productive long-term investment though, and ironically, you are taking more risks with it.
Nobody has ever lost money invested in a well-diversified portfolio if they are invested for decades.
Loads of people lose to inflation and currency erosion/debasement.
What are some things that startups tend to waste money on?
Think about when you are eating your favourite crisp brand. The first one tastes great.
Maybe the second one does as well. By the end of the bag, you wonder what happened to the middle, especially if it is a big one.
When it comes to start-ups, and for that matter individual spending, it is a similar thing.
It is easy to get wasteful the more we have. Therefore, if a start-up has more funding, they are likely to be more wasteful and care less about every penny.
If an individual has more money as income, it is a misconception to assume they will always get exponentially wealthier.
It is all too easy to focus on spending next years salary, regardless of how much money is coming in.
I have found that startups if they receive funding, are most likely to be wasteful on
- Advertising spend
- Staff costs
- Fixed costs
- Time, which is a cost indirectly.
Let’s put this another way. The start-up that doesn’t have funding will begin where the founder does everything and often doesn’t have a real office.
He/she does the sales, the basic accounting, etc. As more revenue comes in, an accountant might be hired as a once-a-year job, and one or two salespeople will typically join.
Only once a reasonable amount of traction has been achieved will such a business hire over ten people, and have huge marketing budgets.
If, on the other hand, a business has secured $10milllion in funding, they are more likely to want to go out and hire people, spend time in a fancy office, get expensive licenses, and so on.
As a final point, too many startups waste money trying to be like everybody else.
These days many people work from home, and it has become socially acceptable.
Previously, many had big office spaces they didn’t need, because “everybody else is doing it.
What are the best ways to use leverage to invest?
We all know about location, location, location for property investments.
In investing, diversification, diversification, diversification is more like the whole grail.
It allows people to get similar returns for lower risk. The most tried and tested ways to reduce your risks are:
- Asset diversification. Don’t put all your eggs in one basket
- Time diversification. Don’t invest for a year or even ten. Do it over a lifetime.
The second point has got some researchers thinking. What if younger investors could buy more stocks?
Stocks beat bonds long-term. They always have. Bonds, however, can outperform during certain time intervals.
The traditional advice, which has worked in a tried and tested way, is to increase your allocation to bonds as you age.
In the book below, the authors have another idea- use leverage:
The argue goes something like this. We need more stocks than bonds when we are younger.
However, most people have less money when they are younger. Being 85% or even 100% in stocks at 21 isn’t always that powerful if the account isn’t worth that much to begin with.
What if you could be 200% in stocks when young? After all, most people leverage 4:1 or 5:1 against property.
The authors therefore argue that people should be super aggressive when young because:
- If things goes wrong, the account isn’t worth that much to begin with
- If things go right, you are increasing your allocations to stocks at a young age
- It makes sense to become super conservative as you age. In other words, they don’t advocate being leveraged forever. They argue it makes sense to be super adventurous when young, and then be ultra conservative if the strategy works
- We don’t worry about leveraging housing and the main reason people often “win” with housing isn’t that the asset goes up that much. It is because younger people, typically in their late 20s or 30s, buy houses on mortgages and leverage against future earnings. It can go wrong, but this strategy works better than cash purchases.
They advocate using leveraged ETFs and some other tools to achieve this aim.
The bottom line is people need to be careful with leverage. Yes, it can work, if done right, but human greed is an issue.
If leveraging 2:1 works out for people, people might eventually go for much higher amounts.
Personally, I am still not convinced that most people should be leveraged, but I can see the argument about using it in a responsible way.
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Adam is an internationally recognised author on financial matters, with over 404.4 million answers views on Quora.com and a widely sold book on Amazon
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