I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 224 million views in the last few years.
On this article, I will use my answers to reader questions on Quora to answer the following three questions:
- Can reinvesting stock market dividends make you rich?
- What are the worst stock market investments you can make during the coronavirus period?
- What are the benefits of being cash poor but asset rich?
- How should a recent college graduate invest a small amount of money?
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (email@example.com) or use the WhatsApp function below.
Can dividends make you rich?
If we look at market data, we find that up to 30% of the stock market’s return is based on dividends.
This is because dividends, if reinvested, compound. Take a look at this calculator.
The S&P500 has given investors an 11% yearly return after inflation since 1950. That is a mere average of course, with some years and decades better than others.
Now after inflation that equals 7.6%. What is interesting is that return is made up of two components:
- S&P500 capital return after inflation (4.3%)
- Dividend return (3.3%+)
These returns are also an average. In some years the dividend return is higher than others.
Dividends, then, can increase your wealth. With that being said, don’t just pick dividend stocks or ETFs.
High dividends aren’t a free lunch. If a company pays a dividend, they are giving investors back a return on their money in cash, rather than reinvesting it back into the business.
Often times, companies paying excessively large dividends are riskier than other firms.
Some of the best performing stocks, such as Amazon, haven’t always historically paid high dividends either.
The tech-heavy Nasdaq has beaten all indexes in the last few decades, despite low dividends.
These tech firms have focused on sales growth and reinvesting income back into the business.
The bottom line, therefore, is that dividends reinvestments are a key component of investing.
That doesn’t mean you should only focus on that area though.
Which is the worst stock to invest in during Corono time?
Even in normal times, stock picking, which means you are trying to pick a specific stock rather than investing in the whole stock market, is very risky.
Or at least it is risky compared to buying the whole market. The history of the market is clear; long-term it will go up, especially with reinvested dividends, but individual names and sectors don’t always go up.
The stock market recovered from the 2020 crash. The airlines and many firms focused on the face-to-face economy haven’t yet recovered.
It took the market three years to recover from 2008. Most major markets hit numerous record highs.
Yet the big banks have never came close to recovering in the UK, US and Mainland Europe.
Take Barclays as just one example of many I could have used:
During periods like the coronavirus and lockdowns, there is more uncertainty than ever before.
Of course a part of that uncertainty has now ended. It has become clear that with the vaccines we will probably be back to “near normal” sometime this year or in 2022, even if the vaccines need to be updated if the virus mutates into something else.
Uncertainty still lingers, however.
That means the following stocks are risky
- The airlines. We don’t know when we will fly regularly again and which airlines will be left. Those airlines which have state support are less risky of course, compared to those that don’t.
- Any hospitality group or any other firm which is reliant on the face-to-face economy, especially in countries which keep locking down
- Any firm which doesn’t have positive cashflow. These kinds of firms are always riskier. Many firms, like Tesla, do show it is possible to run at a loss for years, and eventually turn it around, but it is clearly a speculation to buy firms which aren’t yet profitable.
- Any fads. Fads and fashion change quickly. Similar to the third point, these kinds of stocks are always riskier.
- Stocks linked to commercial real estate. People are working from home these days. These trends were happening before the pandemic as well. Commercial real estate might recover in 2022 or 2023, but uncertainty looms over some parts of the sector.
- Energy stocks. Similar to commercial real estate, oil and gas has suffered. Like commercial real estate, we could see a big rebound in the next year or two, if the economy recovers. That doesn’t mean it isn’t risky though. Long-term, energy stocks haven’t done that well either.
Less risky stocks are the essentials. This includes companies in food, drinks and healthcare.
People aren’t drinking less Coca-Cola, water or orange juice, or eating less cheese.
Likewise, firms which are in the digital economy, who are established, like Amazon and Netflix, are more robust.
Those firms will probably do well, at least short and medium-term, regardless of lockdowns.
Long-term we just don’t know if new competitors will come along and take sales from them.
As always, buying diversified internationally is the safest bet. If you buy a broadly diversified asset like MSCI World, and hold it long-term, you will do fine.
How do I pretend to be poor but stay rich?
That is a difficult question because there are two types of people:
- Those who believe the “typical” narrative that wealthy and high-income are the same thing, and most “rich” people are flash, arrogant and so on. This group of people might even have preconceived ideas about what a rich person looks like:
2. Then there are those who realize that you shouldn’t always judge a book by its cover and that wealthier people aren’t a monolithic group with the same values.
Moreover, this group of people are more likely to have read books and article pointing out that many wealthy people can be very frugal and conservative with money
For the first group of people, they will be fooled if you are not spending much, don’t show off or don’t care about the views of other people.
The second group of people won’t be so easily fooled, and will be less likely to judge you.
I have met all kinds of people. Those who pretend to be rich. Others who want to avoid people knowing they are rich.
There are others who are flash, and plenty of rich or wealthier people who want to be humble.
I have also met loads of high-income, low-wealth people, and others who are quite wealthy but middle-income.
Typically, those people have just saved and invested patiently from a young age.
As the saying goes, you can’t fool all the people all the time.
The best course of action therefore is just be yourself. You can’t control what other people think about you in any case.
What you can control, to a certain extent, is “staying rich”. Spending restraint, sensible investing, lack of complacency and long-term thinking all help with that.
What are the benefits of being asset rich but cash poor?
How would you feel if you were forced to sell an asset at a 20% or 30% loss?
Let’s say you needed to sell your house due to a divorce, but the real estate market was down?
Or maybe you panic sold during a stock market downturn, and thus didn’t wait until the rebound?
Most people would feel bad. Often awful. Yet inflation is the true silent killer of wealth.
Seldom does it eat away at wealth quickly, unless you are living in a country which has very serious inflation, devaluations and depreciations.
Yet these days cash pays less than inflation in most countries. It has paid 1%-3% less than inflation since 2008.
The 2008 financial crisis was a game changer. Historically, except Japan which has had 0% interest rates for decades, an investor could make 1%, 2% or even 3% above inflation with bank savings.
Not as much as the stock market has produced, but less volatile. After 2008, that has no longer been the case.
Nowadays, people’s assets will be eroded, gradually, due to inflation. $100,000, Euros or Pounds left in the bank in 2008, would now be worth 105,000 at best in many countries.
Adjusted to inflation, which has been running at 2%-3% per year compounded in most countries, that is a 20%-30% loss.
It just feels more comfortable than taking a 20% hit on day one, but it is indirectly just as destructive.
Investors in countries with steadily weakening currencies, like the UK and especially some emerging markets, have suffered even more.
I have run out of the number of expats living overseas who have taken this second hit as well.
The biggest advantage of holding assets, therefore, is that you are statistically likely to grow your wealth long-term.
In fact, the number of “get rich slow” kind of millionaires, who have steadily grown wealthy through buying assets, is astounding.
It is a tried and tested way to get wealthy. Low interest rates has perhaps just added a new stimulant to that equation.
Sure, it might be more volatile, but that isn’t a problem for the long-term investor, and somebody who knows how to allocate assets.
I would add one caveat to that though. There are plenty of people who are only wealthy on paper.
For example, people who have most of their assets in a company or a property. That is clearly more risky than a liquid portfolio.
We have seen that period the pandemic. I have lost count of the number of former millionaires I have spoken to.
Typically, they had previously successful businesses in the “face-to-face economy” – bars, restaurant, nightclubs – and never focused on unexpected risks.
For most people, then, having part of your assets in something which is relatively easy to liquidate in an emergency can be important.
What’s the best way to invest $4,000 as a recent college grad?
People do need some emergency cash. Therefore, it is far better to leave the 4k in cash and invest fresh money from your money salary if you have a job.
The steps to take
- Do a bunch of reading related to personal finance and investing. If you don’t have time you might want to outsource it but finding an advisor at an early stage of your career can be tougher due to account minimums
- Start investing one day after you are paid by direct debit. Countless studies have shown people will invest up to 3x more (yes 300%) by doing this. If you try to invest what is left over after expenses, you will naturally overspend more easily as opposed to if investing is almost like a bill payment. So, try to find an investment platform which allows you to pay by standing order or debit or credit card, so it will automatically come out.
- Invest with discipline and consistently over many decades. The reading, as per the first point, will help you with that.
Here are some books to read
- Paul Farrell – The Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money
2. Burton Malkiel and Charles Ellis. The Elements of Investing
3. Larry Swedroe. The Only Guide to an Investment Strategy You’ll Ever Need
Larry Swedroe. The Quest For Alpha: The Holy Grail of Investing
4. John Bogle, The Little Book of Common Sense Investing : Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
5. William Bernstein. The four pillars of investing
6. John Bogle’s “The Clash of the Cultures”
7.Lawrence Cunningham. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition
8. “Security Analysis” by Benjamin Graham
9. Benjamin Graham’s “Intelligent Investor.”
10. Carl Richards, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Your Money.
11. Your money and your brain
I would also read some of Vanguard’s work such as this one – Advisor’s Alpha | Vanguard Advisors
The important thing is to focus on books covering both knowledge but also behavioural finance.
People forget the later point. The biggest reason why investors do stupid things with their money is lack of emotional control, not knowledge.
In the answers below, I answer the following questions:
- Can international stock markets outperform America ones? If so, are we about to see such a period?
- Is it really true that stock market investing is confusing? If so, why is that, and how can people make it less confusing?
- How essential is personal finances to our lives? What problems can lack of money management skills result in?
- What tips do I have for somebody who is new to the investing world?
- How can somebody get rich in Canada? Is it any different to other countries around the world?
To read more click below: