I often answer the questions of clients, readers and subscriptions on Quora, YouTube and countless other social media outlets.
In the answers shared today I focused on:
- What does a beginner need to know in terms of investing in the stock market? More importantly perhaps, what things are often neglected by people new to investing.
- Is it possible to support yourself financially from a stock market investment portfolio? In other words, can you eventually stop working due to your stock investments? What do people get wrong when they think about “passive income”?
- If you want to become a millionaire investing in stocks, how much do you need to invest every month or year? Is it less or more than you might expect?
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.
The basics in any domain is key. If you want to get fit, the basics of good nutrition, exercise and posture is important.
The same is true in investing. It is a myth that you need to be very intelligent to be a good investor as the quote below says:
What people need is
1.Actually get started – 80% of success is just showing up. The same in investing. Just setting up that investing account sounds obvious, but it is key. Beyond that, simple tricks like investing one day after you are paid can increase how much you invest dramatically. Some studies have even shown that people are able to invest 3x more by investing at the start of the month, as opposed to at the end. Over time, how much you invest and for how long, will be even more important than compounded returns.
2.Time and patience – The easiest way to make money, with less risk, is to leverage time. Stocks are risky if you only hold them for a year. Even some of the bets ETFs and indexes are. If you hold them for decades, they aren’t. Don’t confuse volatility and risk.
3. Be diversified. If you hold stocks and bonds together, it is even safer:
4.Basic knowledge at the very least – Or outsource the process to somebody that does have that knowledge. Plenty of people make the mistake of investing without knowing that much about it.
5. Nobody can predict the future – Now sure, countless people can get one prediction right. Some can even get many right. Plenty have an excellent run at predicting things. Over a 40–50 year period, however, it is very unlikely that you will beat the market by making moves based on listening to the talking heads on the media. Countless academic studies have shown that people can’t beat the market by listening to CNBC, Bloomberg and many other media outlets. At least on a long-term basis.
6. Emotional control – This is the most undervalued point. Most people think that the bets investors are the most knowledgeable ones. Yet a very emotional and super knowledgable person doesn’t do well in investing. Every time there is a crash, they panic sell. Even some PHDs in portfolio theory have been found to have broken their own rules in investing.
With the last point, what’s more important is nobody knows how they will react to a stock market crash until they experience one.
Back in early 2020, the stock market hadn’t really crashed in a big way since 2008.
I personally know so many people who “pledged” to me that they would never panic sell like those “idiots” (to use their words) in 2008.
Then 2020 came along, the media screamed this time is different like they always do, and many of those people panic sold.
Another part of emotional control is not getting too excited during the good times or too depressed during the bad times.
Most people look at a stagnant stock market and think it isn’t worth investing in.
Few people wanted to invest in the S&P500 in 1982 after 17 years of stagnation.
Likewise, few wanted to invest in it in 2010 after a “lost decade” . Yet after both periods, stocks went on long bull runs from 1982–2000 and 2009–2020.
Likewise, people shouldn’t be put off by the fact that some markets like the FTSE All Stars has underperformed the US markets in recent times.
One day, and indeed one decade, things will change. Look at 2020. Markets like South Korea, Taiwan and Mainland China did well, as did markets in the Nordic regions.
All of these stock markets were unfashionable a few years ago and saw sub-par returns.
Of course you can. Most people, indirectly due to pensions, are already supporting themselves from the stock and bond markets.
For most people it is the eventual goal, however. Studies show that you can only realistically withdraw 4%-5% of your portfolio every year in retirement if you want the pot to last 30 years or longer.
There is some academic debate about how much is safe to withdraw.
The founder of the “4% rule of retirement” below has said that 4% is too conservative in most situations, and 5% is usually OK.
Nevertheless, it has to be remembered that:
- 4% is safer. Even somebody who retired a day before the 2000 crash and 8 years before the 2008 one, would now have more money in real terms than when they retired. This is assuming they withdraw 4% per year and had 40% in US stocks, 30% in International and 40% in bonds.
- Withdrawals only work if people stay calm during the bad times. Of course even a 3% rate of withdrawal won’t work if people panic sell during crashes, like the 35% of over 65s which Schwab said panic sold during the 2020 crash.
- It is always better to have a conservative buffer.
Most importantly, it is a fantasy to believe that somebody can keep picking the next Amazon, Tesla or Netflix, and retire from say 50k.
Realistically, then, most people need a two-stage process
- The accumulation phrase. This means investing every month no matter what. Investing into ETFs that track the market and other instruments. Reinvesting dividends. Being aggressive. That means focusing on stocks much more than bonds.
- The preservation phrase. This means having more in bonds, and being careful about how much is withdrawn every year. Just like the accumulation phase, being calm and balanced is key.
So, people definitely can support themselves from the stock market.
It just takes time unless somebody has a lot of capital to begin with.
Pretty much 98% of the people I know that have gotten wealthy from investing have done it patiently and long-term.
Get rich slow as opposed to fast. People who think “passive income” is easy if you don’t have a lot of capital have been misread, unless they want just a small amount of income.
As an aside, supporting yourself from a liquid portfolio in retirement is much easier than illiquid assets like real estate.
That is because such assets can’t be sold as easily, take more work and can always leave you own to unexpected time and direct costs.
I know one retired landlord who hasn’t made much money for six months as he couldn’t find a tenant for two months and then the boiler broke!
There is no guaranteed and specific answer to this question because we don’t know the following variables:
- What will be the future rate of inflation
- What stock markets will produce in the future including dividends
- As a result of the first two points, what will be the real, inflation-adjusted, rate of return
- Will the real inflation-adjusted return be higher than historically has been the case due to the rise of AI and new technologies, the same or less?
Nobody can know these answers for sure. What we can look at is history.
Historically, the S&P500 has produced 11.1% since 1950 if you reinvest dividends – S&P 500 Return Calculator, with Dividend Reinvestment. Adjusted for inflation that is 7.5%.
Of course though, that is merely a broad average. In the 1980s, 1990s and 2010s, stocks performed much better than 7.5% after inflation.
In the 2000s (2000–2010) and various other periods, stocks have given 0%.
The trick isn’t to time when to come in and out of markets, but just stay invested.
The Nasdaq has done even better than the S&P500 but is riskier on some measures.
International stocks and especially bonds, which are sometimes needed in a diversified portfolio, have done less.
If you start at a young age, have an aggressive allocation, stay calm during crashes, reinvest dividends and stocks perform as well as they historically have done in the past, then you don’t need to invest much:
If some of those variables change then you will need to invest more.
There is no point in worrying about things you can’t control though.
All we can control is our emotions, if we invest and (to an extent) how long and much we invest.
Others things are outside our control.
My answers on Quora.com have received over 215 million answer views in the last few years, making me one of the most popular writers on that social media platform.
In the answers below I focused on:
- How can somebody living in Africa invest in US stock markets? Is DIY or using an advisor better?
- How can somebody build wealth from the age of 18?
- What are some of the biggest reasons why many wealthy Chinese people invest overseas?
- Why are stock markets increasing during moments of uncertainty like this?
Here is a preview of one of the answers:
You might have read about this man recently – Jack Ma:
The party warned him that he isn’t more powerful than they are. Right now, he isn’t said to be in hiding, but they might move more aggressively against him.
They have made other statements of intent in recent years, including cracking down on Fan BingBing:
And Guo Wengui, who was once a mighty businessman, and is now an “exiled” billionaire:
Added to China’s unstable (note stable and volatility aren’t the same thing. More volatile systems tend to be more stable long-term) political system and history of social unrest, and plenty of wealthy Chinese people make the sensible decision not to put all their eggs in the China basket.
Many get foreign passports as well. In Beijing and Shanghai and beyond, there are many Chinese returnees who used to live overseas, who are living in China on foreign passports.
As China doesn’t recognise joint passports, this makes them partially expats in the country of their birth.
It makes sense on many levels, as it is a way to diversify assets and risk.
Having eggs in many baskets, with some assets in China and some overseas, will ensure they are more likely to gain regardless of the future success of China.
In addition to that, you have another issue. Mainland China’s most prominent index, the Shanghai Composite, has performed very badly since 2016.
In fact, it has been one of the worst performing stock indexes in the world.
That doesn’t mean it will always be that way. It did very well in the 1990s and until 2006, and had a good year in 2020.
Yet it isn’t perceived in the same way as say the S&P500 or Dow Jones, which have always eventually hit fresh record highs after every crash.
Taken together with the fact that the Chinese real estate market which was once hot, isn’t firing on all cylinders anymore, makes overseas diversification a sensible move even for people who aren’t ultra rich.
In fairness this isn’t a Chinese only issue. Globally most people don’t like to put all their assets in one countries basket.
That is especially recognised in countries which have had recent troubles in the last two or three generations.
I am often asked why wealthy people lose their wealth. One of the biggest reasons is complacency.
I saw it with some private business owners operating in Egypt and Tunisia in 2011.
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