I often write on Quora.com, where I am the most viewed writer on financial matters, with over 254.2 million views in recent years.
In the answers below I focused on the following topics:
- Is investing in early 20s a good idea? If yes, then what should be the investment strategy for such people?
- What are the biggest reasons for wealthy people to go broke? Divorce, bad spending habits, vices or something else?
- Is commuting to work best or working from home?
- How can you invest in Chinese stocks and when is the right time to do so?
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The earlier you begin = the lower your risk and total returns.
We are usually told that risk and return aren’t linked favourably. In other words, you need to take higher risk to get higher returns.
That is usually true but not if you leverage time.
The below example from the Federal Reserve Bank of St Louis is a case in point:
Most people know that. What few consider is how being long-term can decrease your risk as well.
If a person invested a day before the Great Depression, that would have been a problem if they would have panic sold.
If they had held the position for decades, it wouldn’t have been an issue, as the market came back.
Finally, if a third person had continued to invest during the depression years with fresh injections of cash, they would have made a fortune as the market was so cheap for so long.
Therefore, it makes sense for most people to
- Invest now
- Invest for the ultra long-term
- Be 90%-100% in stock markets when young, and 10% in bonds. Increase bond allocations as you age
- Avoid stock picking unless you have access to advice. But in ETFs instead that focus on the whole market
- Be diversified across markets and not just in one country’s exchange.
- Don’t panic sell when markets fall, or give up if they have a lost decade.
- Don’t get too excited when markets are up either
- Reinvest dividends
- Invest every month, and put in lump sums when you get them. Investing at different time periods lowers your risk, and we have to do it in any case as almost everybody is either salaried or has a business. So, we need to invest gradually due to personal circumstances
- Don’t try to time the stock markets.
- Read a lot about personal finances and investing or outsource it to somebody who knows what they are doing like an advisor.
- Don’t listen to media sensationalism when it comes to the stock market.
- Focus on your spending habits as well, so you have more to invest to begin with.
- Ignore the noise.
If you do all of those things, you will do well long-term.
I have lost count of the number of people who have become broke during Covid-19.
Typically, they had successful businesses in areas like hospitality, and they never foresaw an event like this.
Few people consider how “black swan” events can affect their business. So, putting all the eggs in one previously successful basket is one area.
Linked to that is lack of liquidity. If you are very wealthy, and your business goes to zero, that isn’t an issue if most of your assets are in liquid vehicles like ETFs, stocks, bonds etc.
In comparison, if you are worth $5m on paper, and it is all tied to your business, then that is an issue if you have a heart attack tomorrow or another event like COVID-19 comes along.
Other reasons include
- Bad spending habits which can only be maintained if fresh money keeps coming in. Eventually, it doesn’t always come in. For example, if you are a sports star who is earning $30m a year after tax and spending $27m, how realistic is it that you will get used to 90% less after retirement at 35…….
- Political instability, although that one is partly linked to the first point. Somebody who planned for events like a radical government coming in isn’t as affected if it happens. For example, when Chávez came in, plenty of wealthy locals already had money overseas and second passports for obvious reasons. It makes sense to be conservative even when times are good. Those who didn’t have these things in place, suffered. Now the country is full of poverty.
4. Sometimes very wealthy people take too many mistakes, and in extreme examples, can lose it all or go to prison. Most wealthy people aren’t involved in criminality though, so this is an extreme example. What isn’t extreme is taking too many, legal, risks, like putting all your eggs in one basket.
5. The inherited wealthy often understand how to spend money, but not how to manage it and make it.
6. Sometimes getting involved with the wrong people. For example, a business partner.
7. Vices like gambling and excessive alcohol.
8. An extreme event happening to somebody you love, and needing to bail that person out.
The commonality of all of these things is not being conservative enough about ruin risks.
Taking calculated risks is essential and most wealthy people understand that.
Most people are too cautious about everything and that is to be avoided.
Yet those 1% risks which can ruin you should be taken seriously, no matter how unlikely they are.
The sensible wealthy person therefore models extreme events and how they would adapt.
The airlines who modelled a 9/11 style situation, or the bars who thought about a pandemic, were wise.
A better way of putting it would be take all the risks you want…..just make sure you are here tomorrow.
In the modern day, where people can work from home in many industries, there is always a third option.
I started to work from home years ago when I worked out some basic facts such as:
- I wasted time commuting to work
- I wasted more time AT work when I went to the office. That included lunch breaks, chats etc.
- It wasn’t like I was a new grad who needed loads of training, therefore I knew what I was doing working remotely.
- I could use some of the extra time to sleep in, if needed, and that increases productivity. The same can be said for exercise. If you are increasing your available hours by up to 30 hours a week due to eliminating commuting costs, gossip etc, think about what you can do with that extra time. You might assume that 30 hours is a lot, but countless surveys show that the average person in the office only works for 3.5 hours out of 8 a day! The other 4.5 hours gets wasted in other activities.
- As an owner, you can see who is really productive. In big teams in the office, people can hide. Others need constant motivation. Yes it is harder to train and motivate people remotely, but the best people don’t need motivating. It reminds me of university. For all of our lives, people who go to university have to spend most of their time studying alone at home or at the library with others. Self-motivated people tend to do better at university than school for this reason. Nobody is pushing you.
- It is better financially, not just because of saved cost, but the indirect cost of all the wasted time. That extra money could, in turn, be invested to create more money.
Saving time, money and CO2. Having more time to work, exercise and sleep in. What is not to like?
Many people realized the same after lockdown and the Covid-19 situation. Plenty now either don’t want to go back to work, or prefer a hybrid model.
One of the reasons for that is that there are other negatives about working at an office that I didn’t previously mention – such as toxic employees/ bosses and environmental concerns.
When I saw how much CO2 was saved by people working at home two days a week, I was amazed, and it is another reason more people will do this in the future.
But it depends on your situation in life. For example, working from home is likely to work out if you are in certain industries, are experienced and have decent space at home.
It is less likely to work out if you are a new graduate, somebody who needs training and/or a tiny place to work at home.
If you can’t work from home, it depends on factors like how much time you waste at the office.
If you are more productive in the office rather than just “feeling like” you are emotionally, it is best to live close by and walk in.
In comparison, if you want to save money, best to commute in or even better, work from home if you can.
With all of this being said, I do think it is good for everybody to at least have a taste of what office life is like.
For instance, new grads. It is also essential to sometimes meet others remotely or in person, to increase creativity.
You can invest in Chinese stocks, both indirectly and directly.
- Investing in a worldwide index like MSCI World which will indirectly give you access to firms in the Mainland and Hong Kong.
- If the aforementioned allocation would be too small for you, you can invest in a China-specific index
- You can invest in firms listed in Hong Kong and Chinese companies on the New York Stock Exchange relatively easily
- It is getting easier to buy stocks listed on the Shenzhen or Shanghai stock exchange from outside of China
As for your other question
- Nobody can time any market, including the Chinese stock market. So, if you want to buy, just buy and hold for decades
- There is no correlation between GDP growth and the stock market. The Chinese stock market has been one of the worst performing stock markets in the world in the last fifteen years, despite claimed high growth in China.
- The previous point does mean that Chinese stocks now look cheap and good value. However, markets aren’t stupid. The reason China looks cheap is that markets perceive that these stocks are riskier. It is a one party state full of risk.
- In the future, Chinese stocks will have their period of over performance like they did in 2000–2006. There is no evidence that they will outperform for forty years.
- As many Chinese firms IPO in the US and other markets outside the Mainland, you don’t need to invest in the local markets in China to get access to some of the best firms in the space.
Therefore, I wouldn’t pick Chinese stocks or have a huge allocation to even the index.
You can get a reasonable allocation through MSCI World or MSCI Emerging Markets.
That is enough for most people, and a better risk-adjusted approach than going all in.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 254.2 million answers views on Quora.com and a widely sold book on Amazon
In the article below I spoke about:
- What are the biggest delusions that beginners have in the stock market, apart from the idea that investing is either very risky or a get-rich-quick scheme?
- Is working hard the key to being rich, or something else like working smart and being persistent?
- Is being a millionaire easier in China or Iceland, or is the question misleading?
- Is making money online in 2021 really that easy?
To read more click below