Is there an ETF bubble?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 359.2 million views in recent years.

In the answers below I focused on the following topics and issues:

  • Is there an ETF bubble?
  • What are some traits to get rich, and more importantly, stay rich?
  • Can you reduce taxes by reinvesting back into your business?

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 (advice@adamfayed.com) or use the WhatsApp function below.

Some of the links and videos referred to might only be available on the original answers. 

Source for all answers – Adam Fayed’s Quora page.

Is there an ETF bubble?

The simple answer is no. An ETF bubble would only occur where the vehicle is going up despite the underlying assets performing badly.

That hasn’t happened. Moreover, since this question was first posted, something has changed.

Namely, stock picking is back in fashion. After the 2020 stock market falls, markets came roaring back.

Many younger investors picked stocks like Tesla and suddenly thought they were experts on the stock market like 1990s tech kids who briefly beat the indexes.

Suddenly making an average of 10% per year didn’t seem exciting when some people thought they could make 700% with Tesla, and likely would pick the next Amazon or Tesla.

Many videos like this were released – “stock picking is back” – even though most of us in the know understand that do-it-yourself (DIY) investors seldom beat the market long-term with this strategy.

In any case, as a result of the last trend, the number of people just buying ETFs and index funds didn’t seem like such a big deal now that more people were stock picking.

So, fewer people are even talking about an ETF or index fund bubble now compared to 2019.

Remember that much as today’s scandal is tomorrow’s fish and chip paper, today’s fear is easily gone.

We see the same thing in other areas as well. People get worried about elections, even mid-terms.

Then the fear goes away and comes back a few years later (2016, 2020, etc). The same with wars, and many other events. These things come and go.

Best not to pay attention to the latest fads and media sensationalism. The media has been calling a stock market bubble since about 1850, and likely will until the day you die.

Likewise, today’s fear-mongering story might be about elections, a bubble in ETFs, or 1001 other things.

Best to just ignore it.

What other traits does a person need to get rich and, even more importantly, stay rich?

In 2022, most billionaires have seen their fortunes fall.

No big deal, the market moves up and down all the time, so they haven’t “lost” money unless they have sold, just as they haven’t “made $20 billion in a day” as per some of the misleading headlines when stocks are going up.

So, in the grand scheme of things, rich lists don’t matter, because of the fluctuating nature of wealth held in the stock market.

Despite this, there has been one interesting story this month. Namely, Warren Buffett, who many people believed was too old-fashioned a few years ago, is the only major billionaire to see his paper wealth increase in 2022.

In doing so, investors into Berkshire Hathaway will have beaten many who went into the ARK fund, which was doing so well until recently:

It is the tortoise vs hare story we all heard as kids and explains Buffett’s wealth, to begin with.

He didn’t even have his first billion before his 50s, and he now has over a 110billion, despite all the money he has given to charity:

Too many people jumped into ARRK after finding out that it had done so well in 2020.

Most patient people won’t become like Buffett, but people could become an everyday millionaire with some patience, like this man, who had $8million as a cleaner:

Apart from patience/having a long-term horizon and not just chasing trends/recent performance, I would say that taking calculated risks is important.

Taking too much risk and speculating, and not taking risks at all, are some of the biggest mistakes that can be made in investing.

One of the biggest reasons for that is misunderstanding what risk is, like the silly idea that cash is less risky than a sensible, and diversified portfolio.

How does reinvesting profits back into a business avoid taxes?

It doesn’t avoid taxes forever, in most cases, at least if the strategy works. Let me explain.

In countries with high corporation tax, reinvesting back into the business will reduce your tax burden.

Let’s give a simple example. A reasonably profitable small or medium-sized business is due to make $1million this year in profits.

There is one owner. He/she can withdraw the majority of that as dividends or income, but then pays income taxes, corporation tax, etc.

Or they can leave the majority of the money in the company as retained profits, in which case there will be corporation tax.

In comparison, if they spend $900,000 on machinery, social media adverts, or another spending, they will only pay taxes on a 100k profit, especially if they keep reinvesting any excess profits.

Yet, of course, this strategy only avoids taxes for so long, because eventually, revenues will keep rising if the strategy works, even if the profits don’t increase.

The only way this strategy will work “forever” is if reinvesting back into the business fails to increase revenues and long-term profitability, in return for sacrificing short-term profits.

Yet that defeats the objective of reinvesting back into the business, which is to play the long game.

Of course, though, it does depend on factors like which country that the business is located in and many other factors, based on tax laws can vary a lot between countries.

Unless you are a multinational who has access to teams of advisors, “the easiest” compliant way to reduce taxes is to change your residency.

For example, you get residency in a 0% corporation and income tax jurisdiction.

Let’s say a British person lives in Monaco or Cayman, sets up the business there, and avoids having too many ties back home.

This is a legal strategy, even if it has some social drawbacks for some people who don’t want to move.

Americans and Eritreans, due to the taxation by citizenship principle, also need to seek new citizenship for that approach to work.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 492.3 million answers views on Quora.com and a widely sold book on Amazon

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