In this blog I will list some of my top Quora answers for the last few days.
If you want me to answer any questions on Quora or Youtube, don’t hesitate to contact me.
You don’t need to save 80% of your after tax income to avoid poverty in retirement unless:
- You want to retire early. Of course, if you want to retire at 35, 40, 45 or 50, you might have to be very aggressive.
- You are literally “saving” money and not investing it. Especially with 0% interest rates, you can’t realistically save your way to retirement.
If you are looking to retire at 60, 65 or 70, you can invest a much smaller percentage of your income.
This chart is a good guide:
With that being said, if you have a very high salary and/or you are living at home, then why not?
Many of the people who achieve early retirement by 40 made sacrifices at a young age.
So, for such people, it isn’t about “poverty” but making a sacrifice for a better long-term life.
Moreover, when the times are good, it does make sense to invest more than the chart shows, because there might be times in your life when you can’t invest anything.
There are two main reasons for this. To speak about the first reason reminds me of something I watched today involving this man:
The former Arsenal player Nikolaos Bendtner admitted in his recent book that he almost went broke due to vices like gambling, fast cars and women.
One night gambling cost him over 400,000 Pounds – which is about $550,000! And that was just one episode.
I am not sure if he declared bankruptcy, but even if he did, he has got his life back together it seems.
The world is full of previously broke people, some of whom did declare bankruptcy, who have became wealthy again.
In fact, some of the world’s most famous businesspeople, have been bankrupt before, and yet managed to come back.
The second reason is wholly different. I think it refers to your question more directly because I guess you are referring to people who remain wealthy even one day after becoming bankrupt, rather than people who “come back” from this event and get wealthy again.
In this case, it is a reality that in some countries being bankrupt just means that you can’t meet financial obligations.
Therefore, in these legal sometimes you sometimes get to keep your house, car and some other asset.
So, some wealthy people hire smart lawyers, and becoming bankrupt is a strategic decision.
With that being said, few people, if any, set out to become bankrupt on day one. Sometimes it just becomes a necessary evil for some people.
It isn’t easy to retire at 40, with $500,000, unless:
- You can live off $20,000 a year, inflation adjusted. The 4% rule of retirement holds that 4% is a safe withdrawal rate. It has held up even during the bad times. Some academics say 5% is safe, and others 3%. I would say 4% still holds. The chart below shows the historically risk of taking out various amounts from your portfolio. To cut a long story short, being 100% in bonds is too conservative. Being 100% in stocks is a bit risky if there is a crash. When you are young you don’t need to care about crashes. If you are retired it is a bit different. So, being 70%-30% in stocks and bonds, or 60%-40%, makes more sense than 100%-0% or 90%-0%.
2. You are willing to take a bigger risk. The 4% rule might be safe, but you can get 5%, 8% or even 10% if you are willing to do something like start rental properties in some high-risk markets.
3. Of course, you could invest the money into business ventures. The danger with that is that you might not be retired in reality.
What I would do is have a two stage process:
- Invest the money first into a growth portfolio. 80%-90% in stock market index funds and 10%-20% in bonds. Add more money to it if you can. Build it up to $1m or even $2m. Delay retirement by 5 or 10 years.
- Then go to a 60%-40% or 70%-30% portfolio. At this stage you should be able to withdraw 40k, 60k or 80k a year.
- Once you have that in place, just rebalance every year, and take out a maximum of 4% of whatever the portfolio value is. If you do this, you should be able to increase your withdrawals with inflation, without running out.
If not, you might need to make other sacrifices. Examples could mean being very frugal in retirement, or moving to a lower cost of living city in your home country or overseas.
That is one of the reasons you see so many Europeans, Americans and Australians overseas.
It is much easier to make the early retirement figures work if you are living in a cheaper place.
Well, first of all, it isn’t true. Rich people, if you are defining it as wealthy rather than just high income, don’t “always” buy cheap stuff.
In fact, wealthy people are less likely to buy certain types of luxury items. Take Rolex watches for example.
According to Statista, Americans who are earning between $7,000-$8,000/month are more likely to buy Rolexes’ than somebody earning above $10,000.
Somebody earning between $2,000-$3,000/month is more likely to own one than somebody who is making $9,000-$10,000! Americans who own Rolex watches 2018, by income | Statista
Yet Rolexes, and watches more generally, are something which some wealthy people buy for a simple reason…..they hold their value.
So, if you spend a fortune on a watch, it will probably at least match inflation. Net, therefore, it might not be costing you anything.
Consumer goods, in comparison, are gone once you spend your money on them. That coffee is gone after you drink it.
Even a new car is worth less the moment you drive it out of the garage. Studies have shown that the average decamillioniare ($10m or above) only spends about 60k-70k on a car.
When I look at my network, there are three types of high-income people:
- Those that are very cheap
- Those who are frugal but they do sometimes treat themselves
- Those that spend whatever comes in
People in the first two categories get wealthy. The people in the third category just have a high-income and “look rich” in the eyes of society, when in reality some of them are struggling.
I referred to a recent example of this 1–2 days ago, when I told the story about how a former footballer almost went bust due to gambling, fast cars etc – Adam Fayed’s answer to How do rich people go bankrupt yet continue to be multimillionaires?
So, don’t assume somebody is wealthy if they are “looking rich”. Some of them are actually struggling.
Covid has exposed many of them. I have lost count of the number of people I have met in the last six months that are close to broke.
Some of them have so much expensive stuff. They are, in many cases, trying to sell them now!
This quote from Buffett is very appropriate for this situation.
Another reason why most wealthy people don’t need to overspend is the ability to get more free stuff.
Sponsors, clients, your employer and various only people will pay money towards your travel costs or whatever your hobbies are.
As an example, if you are an Instagram influencer, so many people will want to give you free stuff to sell to your network.
Likewise, if you are a business owner that is doing well, you will get invited to countless conventions in 5 star hotels overseas.
I have lost count of the number of invitations I have got for those kinds of events, most of which I refuse for various reasons.
An even more extreme example would be Buffett. People pay over 100k to have lunch with him!
So often times, wealthy people can get things for free, or reduced price, if they leverage their network.
It depends on the country and industry. Surveys show as many as 90% of businesses go bust within just five years of starting.
Others are less pessimistic:
The biggest reasons are:
- The owners don’t know how to manage cashflow. The idea that “lack of market demand” or the product isn’t good enough is sufficient, isn’t true. There wasn’t a need for $5 Starbucks 30 years ago, but marketing has changed that. So, owners that are good at accounting, sales and marketing tend to outperform because they know how to manage costs going out and money coming in. It is a bit like a sports game. A good team, ideally, needs to be good in attack and defence. A world class team can lose if the goalkeeper is awful, or the striker misses open goals. The same is true in business.
- People don’t prepare for unexpected crisis like 9/11, covid and 2008/2009. Countless businesses aren’t conservative enough and so don’t prepare for those black swans. Those businesses that were more conservative managed to withstand those shocks, as they shined the roof when the sun was shining
- Not having experience in the domain. People who have existing experiences and clients are better able to start a new business compared to those that just focus on great ideas. Everybody has great ideas. Only some people can execute them properly. That doesn’t mean 100% of business success stories are from people with experience. It is just easier that way.
- Not adapting. The online age has been a great example of this. The internet has existed for 25 years. In the early days, people said it wouldn’t catch on! Even as recently as a few years ago, people assumed it wouldn’t be a big thing for high trust services. It has became a big thing in all industries. Yet it took Covid for many people to fully adapt. And even now, plenty of people are wanting a return to normal, when we were already moving to a digital age. This relates back to cashflow again, as it is usually cheaper for an owner to do business online.
- Idealism. I have noticed that people who believe politically correct things like “do what you love” are more likely to fail than pragmatic business people. There are exceptions and the media loves to speak about these exceptions.
There isn’t such a thing as an average millionaire. Millionaires can come in all shapes and sizes.
However, if we look at the data, there are some commonalities. I would make a distinction to begin with between:
- Developed/high income countries
- Emerging countries, and especially very poor ones
In developed countries, there are loads of “everyday millionaires”. Teachers, doctors, accountants and engineers.
There are many at the $10m+ level, but loads and loads at the $1m-$5m level. Typically middle-income and middle-aged, all they have done is invest prudently for decades.
An estimated 14% of the world’s millionaires are estimated to be teachers, and in some countries, middle-management are the most likely to be millionaires.
Partially that is because there are more teachers and middle-management compared to more highly paid jobs like sports stars, but another reason is the sums add up to gain millionaire status.
Once we get to the $5m and especially $10m range, we see more inherited wealth, but even more private business people who started their own companies.
When millionaires have been asked what are the most important aspects to wealth creation, things like frugality and smart investing come high up on the list:
In comparison, in many poorer or developed markets, you are more likely to see private business owners who are millionaires.
There are numerous reasons for this. The biggest ones are that you can make just as much money as a private business person in a developed country, but usually salaries are lower for these mid-income jobs like teaching, management and accounting.
As salaries and taxes are usually lower in emerging markets, private business people can accumulate a lot of wealth.
It is much harder to get rich slowly if you are a salary earner in an emerging market, although that is changing these days, as more countries are developing.
Globally, inherited wealth has fallen compared to a few decades, and especially centuries, ago. Now the majority of wealthy people haven’t inherited much money at all.
In conclusion, then, long-term investing and starting your own business increase your chances of becoming a millionaire
There are two ways around this:
- Buying the indexes.
The main reasons are
- If more healthcare and online firms get listed on the index, and some traditionally firms get knocked off the index, then you will benefit in any case. If things get back to normal quicker than expected, and the composition of the index doesn’t change much, then you will also benefit
- You can invest in the tech-heavy Nasdaq, a more diversified index like the S&P500 or indeed a bonds index. So, there is no need to put all your eggs in on basket
- It is possible to just buy and hold the indexes for decades, rebalance and reinvest the dividends.
2. Buying individual stocks
You could buy individual stocks in healthcare, technology or any other industry which you feel could benefit.
The problem you will face is:
- On some platforms the costs are higher for doing this
- With individual stocks you always face the risk of the stock going to 0% unlike an index. You also face the risk of decline. So whilst the general market has always hit record highs, some industries never recover. Banks have never recovered to their 2007 peaks, not even for one day. Likewise, airlines might not recover either.
- You are unlikely to beat the market long-term. Only about 5% manage to do it long-term
- It increases the likelihood of your emotions playing a role in investing if you “like” certain firms.
- It dramatically increases your chances of speculating. For example, buying a specific healthcare stock after reading on the BBC that they might have the vaccine.
- Even if you want to go narrow and deep (healthcare or technology as an example) there are ETFs in these spaces.
- It is almost impossible to see trends every time. I remember in the 2006–2008 period, many people were obsessed with buying oil and gold stocks. Emerging markets also had their period in the sun. Often times, people are too late to a trend or completely miss-read what is going on. In 2010 people were worried about inflation and the Fed…….does that sound familiar?
I would stick to a simple strategy. Keep to ETFs and lower risk investments with the majority of your portfolio.
If you have the gambling urge, which many people do deep down, and like the excitement of individual positions, then do that with 10% of your portfolio.
In that case, even if the worst happens, it won’t matter.
It certainty isn’t necessary bad. Let’s make some distinctions here:
1. Business investments
Businesses in China can do very well, go bust or just do OK. That is the same everywhere in the world.
What is different about China, perhaps, is the scale of the opportunity and risks. China has a 1.4billion population and a huge economy.
That is an opportunity. Only India can come close to China’s population. Yet as a one party state run by the CCP, there are many risks.
There are laws, but there is no such thing as the rule of law. The government also favours local firms.
2. Stock Market investments
China’s stock market did well from 2000 until 2006, but has since been one of the worst performing stock markets in the world.
You can see the trend in the last 10 years alone:
If we extended this graph to 2006-present, it would look even worse for the Shanghai Composite.
Some of the main reasons for this has been:
- It is possible to gain exposure to China and the world through the S&P500 index. Apple and major US firms make a lot in China and globally
- China’s market was too overvalued in 2006 ]
- Investors see China’s stock market as more high risk and know it can be manipulated.
- The market is dominated by small retail investors like in the US in the 1950s. Therefore, we see many extremes. For example, in 2005–2006, and 2015, the market suddenly skyrocketed.
- The average Chinese investor prefers domestic property to stocks. The Chinese real estate market had one of its best runs from 2006 until about 2016. Only more recently have more Chinese people considered stocks again, now the real estate market has hit a peak. With a lack of foreign interest compared to 2000–2006, the market has struggled.
- You can also access Chinese growth through the Hong Kong Stock Market, which until recently, was considered a safe heaven compared to the Mainland for this kind of thing. Therefore, people who wanted access to Chinese growth, sometimes did it through Hong Kong or indirectly through the S&P500. Many Chinese firms IPO outside of China. Again, this is another reason to avoid the local stock market. It isn’t like the Shanghai or Shenzhen stock markets are the only way to gain access to China’s growth.
- People are finally realising, at least some people, that growth and stocks aren’t always linked.
With that being said, China’s stock market does look undervalued now. It has trading at just over half of its 2006 value.
Every dog has its day in investing. Just as China’s market outperformed from 2000 until 2006, it will surely have another period of over-performance some day.
It has done pretty well in 2020 so far, with only the Nasdaq doing much better than it.
It isn’t a bad idea, therefore, to have a 10% allocation to China. You can get it indirectly through MSCI World and MSCI Emerging Markets.
Anything else is a risk though, for the reasons alluded to.