I often write on Quora.com, where I am the most viewed writer on financial matters, with over 255.8 million views in recent years.
In the answers below I focused on the following topics and issues
- Is it safe to keep your entire savings invested in the stock market? Most people would assume no, but I explain when it is safe to do so.
- If time is money does money make time?
- Does it make sense to sell your Chinese stocks?
- How should you prepare for a stock market crash? Or is it a mistake to even try considering because nobody can predict the direction of the stock market?
- Can you really sell 4% of your investment portfolio every year and not run out of money, or even reduce your wealth over time? I look at some of the nuances of the so-called 4% rule of retirement.
- Is life all about money? Money does extend lifespans, gives one more choices and allows you to have more time if you wish, but it is everything? I explain why it isn’t and balance is key. In particular, I speak about the importance of things like time, experience, friendships and family.
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It depends on the following factors:
- How you are investing in the stock market
- How long you invest in the stock market for
- The manner in which you react to declines in the stock market
- How old you are
For the first point, if you are investing in the whole market through ETFs, index funds or other diversified investments it isn’t very risky at all, as opposed to investing in individual stocks.
That is especially the case if you are long-term as per the second point:
If you are in your 20s, you could have 45–50 years until retirement, and even in retirement, it isn’t like you will sell out on day one.
The rational thing is to gradually sell your position over time. Therefore, what’s the worst that happens if the market falls big?
Well, you just keep buying monthly as you were before, enjoy the low valuations, and wait for the market to come back as it always has historically.
The only time this isn’t safe is if you panic when stocks are down and liquidate at the wrong time.
This is one of the biggest reasons for these results:
It therefore can make a lot of sense to be 100% in stocks when you are young, if you are in a broadly diversified portfolio and ultra long-term.
With that being said, I do think having a small emergency surplus of money makes sense, as does increasing your bond allocation as you age.
Bonds and other non-correlated assets tend to outperform markets during the extremely bad years.
That is one reason it makes sense to gradually increase your allocation to non-market assets as you get older.
Therefore, being 90%-100% in stocks in your 20s, 30s or even 40s, can make sense.
Within ten years of retirement, it makes sense to reduce that a lot.
The following graph illustrates why the 60%-40% portfolio (60% in stocks and 40% in bonds) isn’t “dead”:
Money can buy time in certain ways.
- It can buy you more time on earth
It is a sad fact (perhaps) that life expectancy, and indeed the number of healthy years on earth, is correlated with money.
That is because money can buy better healthcare, preventative care, diet etc.
Needless to say, this is only an average, and there are plenty of richer people who also die young.
2. It can buy time now
Money can buy other people’s time. That could mean getting a cleaner in, employing people as a business owner etc.
It can also buy technology’s time. With automation and technology taking over more tasks, it is now possible to buy time 24/7.
For example, ads can run when you sleep, and in some cases do more than a team of people can do.
Yet it doesn’t automatically buy time.
There are plenty of time poor wealthier people, just as there are people who are poor who have loads of time.
Money merely gives you more choices. Once you have reached a certain threshold, you can decide to be that wealthy person who works 16 hours a day, or early or semi retire on the other end of the extreme.
It often depends on a person’s character and what they want from life.
Many “type A” personalities with use the money to buy more time (other people’s time and the time of technology) to make more money and be busier.
Others will take it easy as soon as a certain level of comfort has been reached.
Either way it is wrong for people to suggest that most wealthier people are lazy or workaholics on the other end of the spectrum.
It depends on many factors in reality.
I can’t answer for sure because I don’t know the following facts:
- How much you had invested
- Which individual stocks you invested in, or if you bought the market through a fund or ETF
- How much tax you pay on capital gains where you live
- If you are paid in Chinese RMB which therefore means investing in local stocks makes at least some sense due to the currency risk of overseas stocks
- How much of the portfolio was in Chinese stocks as a percentage
- How much profit/loss you were sitting on
- What sectors/industries you were in
Even though I can’t answer specifically, I can speak in general terms.
As I have said on many other answers, Chinese stocks look relatively cheap or in some cases very cheap.
If you take technology valuations, as an example, Chinese tech firms look much cheaper than US ones on most measures such as CAPE, p/e etc.
Yet markets aren’t stupid even though they aren’t always efficient.
The fact that Chinese stocks looks cheap is because they are riskier.
We saw that with the recent nonsense with Ant:
The political risks are bigger in China, as are some other risks.
Having 10% or so in China isn’t a big risk if you aren’t living locally.
Even 30% is OK if you are living locally and plan to retire in China.
Yet considering you can gain access to China through MSCI World and MSCI Emerging Markets, there is no need for a non-resident to have a huge allocation to the market.
Many people made that mistake after the huge bull run in emerging markets in the early-mid 2000s.
If you have been through crashes before and have seen it all before without panicking, you don’t need to prepare as Roger said below.
Crashes come with the territory. The Dow Jones went from 66 in 1900, to 2,000 in the early 90s and 34,000 today, but there have been loads of crashes in the middle.
They come and go:
What is more, nobody can predict when they will come. Timing the market just doesn’t work.
This quote says it all:
Therefore, the only way you can productively prepare is to mentally prepare.
If you can go into investing realising that there will be good and bad times, but the average trend will eventually be good, then you will do well.
People who try to prepare for crashes by predicting when they might come, shifting assets into bonds or cash or watching too much financial news end up regretting it.
At least long-term.
The 4% rule of retirement withdrawal does not hold that you can never lose money or net worth.
It holds that you shouldn’t run out of money, even if your retirement is long like 30+ years.
What is true, moreover, is the 4% rule includes a conservative buffer.
In fact the founder of the rule has said that 5%+ is usually OK, but 4% is safer in very extreme situations.
To illustrate how conservative the rule is in reality, imagine you retired one day before this event:
The Dot-Com crash. And therefore eight years before 2008–2009:
Assuming you were 40% in bonds, 30% in US stocks and 30% in an international index of stock markets, you would now have more money than in 2000!
This is assuming:
- You didn’t take out more than 4% or sold 4% + took out the dividends
- You didn’t panic sell during the crash
- You weren’t engaging in high-risk things like timing the market or individual stocks
- You weren’t in very niche positions like a random ETF tracking a very small stock market and you have 100% in that position.
Remember that in most 30-year periods, the US stock market averages 6%-8% after inflation, with International doing 4%-8%, if you factor in dividends.
Fixed-income pays less, but you can see that it is workable to take out 4%.
The key is not giving up if there is a “lost decade” like from 2000 until 2010.
Needless to say as well based on my above answer, fluctuations and declines in wealth, aren’t “losing” your money.
Often you need to just wait for the markets to come back.
Would you want to be blind tomorrow in return for $5m?
Or, would you want all your family members and friends to die next week in a train crash on the way to a group trip?
Of course not. Therefore, life can’t just be about money, even though the aforementioned examples are extreme.
For most people life is a balance and the following things are important:
- Love, friends and family. Sometimes pets as well!
- Enjoyment and hobbies
- And yes money and security.
- The feeling that you are making a difference in the world. For some that could be volunteering. For others it could be donating to charity.
It is true, however, that the opposite end of the extreme is equally as silly.
Some people claim that money doesn’t matter at all and you can be happy with virtually zero money.
The reality is, in the real world, many of the following problems are caused by consistent lack of money:
- Break ups and ending of friendships
- Bad health
- Even early death
- Depression and anxiety.
- Feelings of regret later in life
Often one thing leads to another. If you are hard up, you might ask a friend to lend you money.
If you don’t pay him/her back quickly, that causes strain on your friendship and sometimes even health.
So, life isn’t all about making money, but money can allow you to make better choices if you are wise about it.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 255.8 million answers views on Quora.com and a widely sold book on Amazon
In the article below I spoke about:
- What financial advice is obvious but worth repeating? In addition to obvious “rules” such as live below your means, what other things shouldn’t we forget?
- Does getting an MBA help you start a business? I look at the pros and cons of going to business school even though I come down strongly on one side of the argument.
- Are healthcare ETFs the best to buy? I speak about the pros and cons of healthcare, including new growth areas such as health technology rather than the traditional (and conservative) firms.
- What professions can make people a millionaire by 30? I have often pointed out on previous answers that there are many middle-class and middle-aged millionaires, such as teachers. However, if you want a more aggressive strategy, which jobs or industries potentially allow you to achieve this aim early?
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