I would firstly like to wish my clients, readers and followers a happy new year.
Don’t forget to read my analysis for Envision Magazine about some of the trends to watch out for in 2021.
Before doing that, it has to be remembered that 2020 was a very strange year.
In this context, it is understandable that my most viewed content was related to the coronavirus, stock markets crashing and the real estate market which has been affected by the pandemic.
I am proud to say that the advice I gave in the worst of the crisis, that this time isn’t different and don’t panic, once again proved to be true.
US and some other stock markets rose by over 10% in 2020, and increased by over 80% from the worst of the lows in March.
This answer might shock you because it will show why investors during the Great Depression, actually could have made a profit barely a few years later……but more on that below.
Firstly, a good investor should imagine they are controlling a catapult.
You need to load it with “balls”. The more balls you loads into the catapult, the better for your “attack”.
This is what an investor often needs to do. In your working years, you need to fill the catapult with units, and then “fire” (sell) these units in retirement.
The lower markets get, during the virus, means the more units you can “fill up on”.
So take the Vanguard Total Stock Market ETF (VTI) as an example.
The price now is $123.31. So if you have $15,000 to invest today, you can buy 121.64 units.
In comparison, imagine the price was $62 – about half of what it is now.
In that case you can buy 241 units. So rationally speaking, a young investor should want markets to fall, and somebody approaching retirement should want them to rise, as they will want to be net sellers.
I will give you a simple example of somebody profiting from the Great Depression.
Let’s say somebody bought the Dow Jones in 1929 right at the outset of the biggest financial crisis ever – I know index funds weren’t available in 1929 but stay with me while I illustrate a point.
Let’s keep this simple and say they invested $10,000 a year (adjusted for inflation) from 1929 until 1960 when they retired.
They would have made an absolute fortune. More than if markets had kept going up in a straight line!
In fact, they would have made about 12x-14x more than they put in, despite all of the deflation of the 1930s.
Why? The markets had a brutal 90% fall from the absolute peak to the absolute bottom and stayed low for years.
So during those years that young investor (or even middle aged person) in the early 1930s, could have “loaded up” his balls for the catapult for a few years.
What about somebody with a lot of money already invested?
You might say, the last example only works because somebody who invested $10,000 a year (inflation adjusted) from 1929 until 1960, only invested during a few “awful years” when they had less invested.
In other words, it wasn’t as if they had 100k invested on day 1. They were only getting started during the worse of the crisis.
So let’s look at another example:
“Person 2” had a 100k lump sum (inflation adjusted again) invested in 1929 + they add 12k a year in each subsequent year.
How scary you might say! They invested 100k just before a 90% decline!
So how many years would it have taken their portfolio to recover?
1930 = 112k contributed. Account value = 76k. A big drop
1931 = $124k contributed. Account value = 54k. A massive drop
1932 = 136k total contribution. Account value = 54k. An even bigger drop!
1933 = 148k contribution. Account value = 90k. Green shoots!
1934 =160k contribution. Account value = 98.7k
1935 = 172k contributed. Account value = 150k
1936 = 184k contributed. Account value =……….232k!
So the account is up substantially within 6–7 years of a Great Depression…..despite having a decent sized lump sum at the beginning!
The reason is simple. Markets might have declined 90% from the very top to the very bottom, but by patiently investing during this down market, this investor has “filled up their catapult with units”.
And that isn’t factoring in:
- Deflation which was huge in the 1930s
- If you rebalanced from bonds the figures above would be huge
- Of course if this investor would have carried on for 10–20 years more, the returns would have been bigger.
A more recent example – The Nasdaq
From 1995 until 2018, the Nasdaq produced about 12%-13% per year for a lump sum investor but from 2000–2002, it fell by 76%!
Yet somebody who bought extra units during that period would have gotten even higher than 13% returns for obvious reasons.
Why? The Nasdaq was 900 in 1995. 5,050 before the crash in 2000.
It hit 1,200 at the bottom in 2002 and stayed low for years, before hitting 10,000 1–2 months ago, before the recent fall. It also fell a lot in 2008.
So somebody who rebalanced from bonds into the Nasdaq from 2000–2002 and 2008–2010, and monthly invested via their salary, could have made up to 15% per year, by taking advantage of the lower valuations.
I am not implying that people should focus on the Nasdaq over the S&P500.
I am merely saying an investor shouldn’t fear big falls if they rebalance and/or are young enough to deal with the volatility.
So surely an investor should just wait for the right time to get into the markets?
It isn’t that simple. Nobody can predict what will happen to markets, even though they have always historically came back to hit record highs.
So the easiest thing is just to buy index and bond funds. Short-term government bonds went up during the last month, but medium term ones fell.
If you have $100,000 invested and $70,000 is in markets and $30,000 is in government bonds, and markets dip again, add more and rebalance from the bonds.
Don’t try to focus on if your portfolio is going up or down during the crisis.
Focus on what things will look like in 20–30 years or whenever you plan to retire.
Since first writing this question, stock markets have skyrocketed by 80%, yet the point I was making is that you shouldn’t fear a period of falling markets.
People over-analyze this question sometimes. What’s the best gym in the world or in your area?
I imagine what is more important is your own diet, techniques, how often you go and so on.
Whether to use a personal trainer or not as well, if you are lacking in self-control.
The same for markets.
What counts is:
- How much you invest
- How long you invest for
- Do you panic or stay calm when markets are down
- What you are invested in
- Basically how you behave. Most investors fail due to the behaviour gap as this book showed
This leads to returns like these:
So the actual platform or app doesn’t matter as much as people think.
You can get two investors, both on the same investment app or platform, that get two completely different results.
Things like the technology and ‘beauty’ of the screen don’t make a difference to returns.
So the “best” investment apps actually help you, indirectly or directly, to do some of the things listed above.
The last few months should have taught everybody that predictions are a fool’s game.
Who would have thought on January 1, that even liberal democracies would be closed down?
So I will make a few predictions, on the caveat that they might be completely false!
- Existing trends will continue – we were going into a digital world with less face-to-face contact even before the crisis. Now Netflix, Amazon et al. are benefitting further. Even smaller time online operators, are seeing demand skyrocket. I spoke to an owner of a niche online education company. His sales and indeed profits have almost doubled.
- Inequality will increase eventually – as per number one and the online trend. I also agree with Bob, the economist below, when he says that asset price inflation is the more likely result of the QE than general inflation. Meaning that stock prices (or the indexes not all stocks like airlines obviously) and maybe real estate will eventually go up. Now sure, there might be a time lapse, especially for real estate. Many people won’t want to put down 500k on an illiquid asset bought on mortgage, during a virus! However, we have already seen markets partly recover from the bottoms, and that trend will eventually continue. Fewer people and businesses will want to get 0% in the bank, especially amidst all the liquidity in the system. Dalio speaks to this trend – Ray Dalio Still Thinks ‘Cash Is Trash’ as Printing Presses Roll
- The economy will boom again – however, it is more likely to boom for those who are online (working for an online company or own one) and people who own assets. So the middle-class who own assets and wealthier people, unless those wealthy people don’t pivot away from their face-to-face businesses
- Longer-term there will be recovery for a wider range of people – Recessions and “resets” allow business to be more productive. We have gotten used to wasting time, money and energy on pointless activities like numerous face-to-face meetings, taking 1–2 flights, to see customers. Not me personally, I gave up on that a few years ago, and it has been great! But most people were struggling to deal with the move from an analogue world to a digital world. Longer-term, I think people will adapt, and get rid of old-fashioned beliefs and ideas.
I could be wrong, though. Let’s see. This is one reason most people struggle to own their own business.
There are many moving parts and variables, some of which you can control, and some of which you can’t.
So a rational individual or businessperson shouldn’t worry about the things he or she can’t control.
All that somebody can do is do some rational things. Spend less on discretionary spending for a few months, to build up more capital.
Invest away from cash, but be long-term, not caring about if markets go up or down tomorrow or next week.
Pivot if you have a private business and you aren’t already operating effectively online.
$200,000 p.a. That is approximately how much income you can have from a $5M portfolio, if you decide to quit work.
He looks a bit scruffy! I post this to show you it isn’t just the super-rich like Zuckerberg who dress like bums….
Now let’s compare him, to the way that most people think the rich behave……
This isn’t the way most wealthy people behave. Many wealthy people feel ashamed when they splurge.
I also explained my own experience of feeling ‘ashamed’ about taking business class flights and keeping it a ‘secret’ until yesterday at least! –Adam Fayed’s answer to What is the mindset of people who constantly show off in social media like?
This feeling of shame, even though they are one-off luxuries once or twice a year, probably would surprise most people.
What is more interesting is from the consumer side. In other ways, those who ‘show off’ mostly have a following amongst poorer people.
For example, young and impressionable people, who haven’t seen enough of life. The higher up you go up the income scale (and especially wealth scale) the fewer people are impressed by this sort of stuff AND the more they admire modesty and frugality.
I will give you an example. Last year I went back to Shanghai. I reconnected with a few of my old clients — expats in Shanghai.
I told them I had my own business. They asked a few questions. I told them I had an online business, as it is cheaper, more efficient and so on.
A number of country managers and expat-CEO types made comments like ‘That is right up my street, Adam!’.
They admired the business model. It made sense to them. They think ‘well less costs = more money in my pocket’.
They know an online business is less likely to go bust compared to a firm with big flashy offices, as cash flow is king.
In comparison, I spoke to one or two people who were much lower income (like teachers and others) who thought things like:
‘He can’t even afford an office’.
‘He only has 10 or 12 people in his company. Why use him when I could use a bank?’
The assumption that poorer people sometimes have, is ‘If you don’t have something you can’t afford it’.
You aren’t deciding not to afford it. Don’t have a flash website? You can’t afford it! Don’t have an office? Can’t afford it.
Don’t have a flash suit? Can’t afford it. Don’t own property and rents? Can’t afford to buy. Their thinking is, why would anybody who has the means, not want these things after all?
Well it may seem that way to somebody who has never had anything……..
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