I often write on Quora.com, where I am the most viewed writer on financial matters, with over 383.8 million views in recent years.
In the answers below I focused on the following topics and issues:
- Is gold a hedge against stocks?
- What is the “rich person’s” investment strategy?
- If you purchased tech stocks in 2021, was that foolish?
- Why do people sell during a crash? Is the reason that they don’t expect a rebound?
- What is the main difference between poor and rich people?
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Is gold a hedge against stocks?
Gold isn’t really a hedge against anything. It is more a speculation, which culturally speaking, still holds sway in some countries.
Ultimately, gold doesn’t pay a dividend, yield, coupon etc. It also doesn’t have earnings growth or dividends like stocks.
Therefore, the only reason to buy gold is the hope that somebody coming after you will pay more for the same thing.
That is a speculation, and very different to:
- Owning farmland as Buffett explains below, which produces a yield:
- Owning any dividend-paying asset, or something which has earnings growth like stocks.
- A private business that has cash flow and revenue, just as publicly-listed businesses (stocks) have the same.
The same distinction between speculation and an investor is true when it comes to real estate.
The person who invests to get a good rental income is an investor.
In comparison, those looking only for capital growth are speculators, especially if they are flipping.
So, to answer your question, gold isn’t a hedge against stocks, or for that matter, inflation:
Let’s look at the last 15–20 years
- Gold’s best recent period was between 2000–2011. What was the worst moment in that period? It was during the worst of the 2008 Financial Crisis.
- After having a few bad years from 2011 until 2016, gold has done relatively well since then, but the worst moment was during the 2020 stock market crisis when gold fell.
- Inflation has risen in the last year, but gold has been stagnant. There have been many similar periods in the past.
- Gold has never recovered from its inflation-adjusted height seen in 1980.
You could argue that gold gives you diversification. It is for that reason it is in Ray Dalio’s All-Weather Portfolio.
He is less bearish on gold compared to most investment professionals, but even he admits gold isn’t a great investment.
It only makes sense in very extreme times like if you were being persecuted by the Nazis in 1941.
What is the rich people’s investment strategy?
People who have high-incomes, or for that matter wealth, aren’t a monolithic group.
They don’t all look like the people in the image below!
But for the needs of this answer, I do need to generalize, so I will focus on the wealthy.
In general, wealthy people aren’t looking to beat the market, and are more looking for the preservation of capital.
Think about it this way. Somebody who has started up a company and sold it on, or for that matter is just taking a great dividend every year, has already beaten the market.
In many cases, beat the market by a huge amount, by:
- Taking many calculated risks
- Working really hard and/or smart
- Keeping to what they know, usually in a specific industry
- Having wealth concentrated and linked to a specific company, rather than a diversified portfolio.
- Being in the right place, at the right time, coupled with some of the points above like taking calculated risks. This is especially the case for people who have got into a new industry, like the internet in the 1990s.
Therefore, once the fast-growing stage of the company has come and gone, the founder is looking for the opposite of this.
In other words, diversification, preservation, less time and effort by outsourcing to an advisor, and so on.
The same is true for people who got wealthy by investing. The majority simply invested from a very young age and compounded.
But one day, typically closer to retirement, those kinds of people want to take some risk off the table and have a more diversified portfolio.
The point is, investing to want to become rich, is very different from investing if you are already wealthy.
Silly me bought mainly tech stocks in 2021 and now they keep tumbling. What should I do? I keep holding onto them thinking they will bounce back but it doesn’t look very promising with China enforcing the mask mandate.
You have done a few things which are quite normal:
- Bought when stocks skyrocketing and are considering selling when they are going down
- Worrying about things that won’t have any effect on the long-term market like mask mandates
Let’s look at this in another way. Were people who purchased technology stocks, one day before the bubble burst in 2000, stupid?
Most people would say yes. However, the reality is different. Assuming somebody bought the Nasdaq, rather than individual tech stocks, they would have made an excellent profit from then until now.
But it took the market 14 years to fully recover from that fall. That didn’t impact the long-term investor.
In fact, an investor who put in at the peak, and then invested every month or year thereafter, would have made even more money, because they were buying for over a decade at cheaper prices.
The problem is, few people do that. It isn’t just with tech stocks.
We can see the same with:
- Emerging market stocks. “Everybody” was interested in 2006 or 2008. Few in 2020 after a bad decade
- US stocks. Few were interested in 1982, after almost two decades of stagnation, or in 2010, after one decade of stagnation. Yet most people are interested during the moments when the market is doing 15% per year. The sensible people are just happy to see the good and bad times and even out at a good return
- Other assets. People became interested in gold in 2011, not in 2000, and oil in 2007 and now, rather than in 2009.
This is one reason people end up buying high and selling low. It is greed on the way up and then fear on the way down.
Best to think in terms of decades, rather than years, when it comes to your investing.
If you do that, it will transform your perspective. Suddenly you will be delighted if your account is down and you, therefore, are able to buy more cheaply with fresh dollars, pounds or Euros.
When you are a net seller of units/investments (you are retired or five years away from that point), it makes sense to not want asset prices to go down, assuming you aren’t diversified properly. If you are any younger than that, you shouldn’t worry.
This is why investing is simple, but not easy. Human emotions get in the way.
Even since this question was written, tech stocks have started to recover.
During a stock market crash, do people selling stocks in a panic think that the stock will never rise even in the long-term?
Don’t just stand there do something!
That is usually fine advice in many domains of life. If you are feeling ill, it is better to go to the doctor.
If you might have a lawsuit, speaking to your lawyer might make sure. And if you are going to come back to your home country and you have assets, have a consultation with an accountant makes sense.
Better safer than sorry.
In most domains that means actually doing something! Be active!
That can also work in finance and investing as well. Going from having cash, losing to inflation, to stocks and a diversified portfolio, makes much more sense than being passive and procrastinating.
The problem is when people are already invested. We don’t know how markets will react short-term, even if they have always gone up long-term.
Stocks might increase, fall or even crash, and nobody can predict with any certainty what will happen.
What we do know is that:
- Every time there is a stock market crash, it is human nature to think “I want to do something” and not just be active. That is despite a lot of evidence showing you should do the opposite
- There will be booms and crashes along the way. That comes with the territory
- Every time there is a big crash or even correction, there will be people saying “this time is different”. Markets this time won’t recover. Of course, this is always nonsense, but it doesn’t stop paying worrying.
- The long-term investor should be happy whenever markets are down. Most people are investing every month or year. The longer markets stay low means the lower the average price you are paying
- The ability to control your emotions is the hardest, and most important thing, in investing.
So, yes, there are people who always have irrational thoughts that markets will never recover.
They subsequently regret it though. The ironic thing is, though, that they often make the same mistake a second time around.
The same people worried about Trump getting elected in 2016, often panicked about the 2020 election and were surprised on both occasions when markets did well.
The same people worried about the Covid-19 falls are worried now with Russia-Ukraine, and so on.
What is the main difference between the poor people and rich people?
The 2008 Global Financial Crisis hits. The wave of technological innovation which stalled after the 2000 tech stock falls begins again.
As people are angry at the traditional banks, those offering an alternative, like Wise and Revolut, start to gain market share after a few years.
More online firms across all sectors in finance, including brokerages, gain traction.
Traditional ways of doing business, like cold calling or meeting people at events, get less important than a good online presence across many industries.
There are two mentalities/approaches here
- Some complain about automation, technology, and so on. These people don’t adapt, and sometimes ask governments for help or want them to regulate the new players more
- Then there are those who adapt to the new world, and see it as an opportunity to have a global presence and have lower fixed costs as an online company that doesn’t need a big office
That is just one example of a wider point I am trying to make. The point is, richer people (or those who will become richer with time), understand that you shouldn’t worry about most problems.
In fact, you should embrace problems. The more problems there are means you can create a solution, which if marketed correctly, could make you a lot of money.
We see the same thing when stock markets are down. The long-term investor sees it as a great opportunity to add more.
Others panic, and wait until things are clearer before investing fresh capital, losing out in the process.
Beyond that some differences are
- Wealthier people are more likely to make quicker, more efficient decisions.
- People who are wealthier, believe it or not, are more trusting. This is the opposite of what people assume. In general, this comes from experience and having more tools to judge others by. In other words, having confidence in your own ability to filter out the bad players/companies, and trusting those who get past the filter.
- Investing rather than saving money
- Playing the long game, and not focusing on short-term wins. If people have got used to poverty, they are more likely to prefer $1 today than $2 in a year, even if they don’t need that money now.
- A willingness to get out of comfort zones.
Of course, these are generalizations only. It does also depends on how the person acquired the money, as well as individual personality.
Being self-made is very different from having inherited wealth, as is getting wealthy from being a sports and entertainment star as opposed to in business.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
