This post will run down our top Quora answers for the week.
For numerous reasons.
The main ones are:
- He isn’t alone. Most financial pundits are the same
- Entertainment sells more than saying the same, sensible things over and over again. If Cramer just told people “buy and hold for 50 years” people would question why he is needed
- People have short memories as per this quote:
4. Human nature can be shallow. So in the same way that yesterday’s scandal is today’s newspaper for fish and chips, people just forget about his past predictions.
5. In the same way that a singer can be a one hit wonder, pundits can make a career out of 1 right prediction. Look at Peter Schiff and others. They often get 1–2 big things right but have a 10% strike rate at best, and yet often get introduced as “the person who correctly predicted 2008”.
You get wealthy investing by:
- Being long term
- Investing regardless of whether markets are up or down
- Being diversified
- Ignoring the news media and the latest news about China, shutdowns, virus etc. Or just taking it with a pinch of salt.
So many people take the news media too seriously. They exist to put bums on seats and not to educate.
Fear is great for the sellers of that emotion. It definitely gets bums on seats far faster than hope. It is seldom, if ever, profitable for those following the advice though.
Do something simple. Google certain phrases. Then see how the same media outlets advocate the opposite.
For example if you Google “markets fall on news of bad GDP data ” you can see loads of articles.
If you then Google “markets rise despite bad GDP data” you can see the SAME publications, and even sometimes the same pundits, arguing the opposite opinions to those they previously stated.
In February, many publications said that “US Markets hit record despite coronavirus”
They said the same recently on news of the Nasdaq hitting 10k+. Then in March they claimed markets were falling due to the virus or lockdown.
There always has to be a grand explanation when in reality markets, and individual stocks, can rise or fall for loads of reasons.
Imagine there was a sale on. Buy 2 ice creams for 1. The line of people waiting would be huge!
When goods are on sale, there is usually a line of people waiting, like on Black Friday:
Same thing with houses. If the price of London, NYC, Hong Kong or Singapore real estate falls of a cliff this year, there will be many buyers, as these markets have had a consistent period of over-performance.
The rational investor should also have a similar attitude to liquid, ETF/index investing.
You should welcome any period of falling markets. It is a chance to buy units at cheaper prices.
If you are a monthly investor, it is a great opportunity. Look at the Nasdaq in recent decades.
Somebody who put in a lump sum in 1980, 1985, 1990 or 1995 would have made a fortune.
However, there was a long period of stagnation after 2000. It fell by up to 78% after the peak of 2000.
It took over 15 years for the Nasdaq to fully recover – NASDAQ Composite – 45 Year Historical Chart.
Yet somebody who would have invested monthly from say 1995 until today, would have benefitted from that long period of stagnation, compared to somebody who invested from 1990–2000 and just say markets go up.
The lower markets are + the longer they are lower = the more your account will be worth once there is an upturn.
It is like loading your gun with more units. If person 1 gets a constant 10% for 30 years (impossible i know but let’s use it for this example) they will have $2.1m after 30 years investing $1,000 a month.
If person 2 gets 0% for the first 10 years, then 7% for the next 10 years and then 17% for the next 10 years, they will have over $2.3m.
Most people want a period like the 90s (16%-17% per year) and 2010–2017 (12% or so per year) when they start investing.
It is far better to invest during a time of stagnant of falling markets, but it doesn’t make sense to leave money in cash waiting for the fall.
So the best way to mentally prepare? Show yourself a long-term graph of the S&P500, Dow Jones or Nasdaq and remind yourself that falls are profitable.
Since your answer was written a few months ago, what has subsequently happened has given you the answer.
Markets rose a lot. That was unexpected for many people. In the same way that the fall was unexpected for many people in March.
The virus and especially lockdown took almost everybody by surprise.
If somebody would have predicted on January 1 that we would have had a lockdown even in democracies, people would have assumed that person is crazy.
So the point is, nobody can predict the future of the economy or markets.
We only know that:
- Historically markets have always gone up long-term in the case of most major indexes
- In the case of the US indexes in particular they usually hit record highs every few months or years.
- If they have a period of stagnation, that is good for the long-term investor as you are buying cheaper units
- Having bonds and stocks makes sense and not 100% in stocks as bonds outperform stocks during years when markets are falling and vice versa.
- Nobody can time and predict markets
- Cash pays 0% in most countries
- If you aren’t invested you don’t have dividends to reinvest.
- Markets falls look tiny if you extend the graph long enough. In the future, it really won’t matter much if the S&P500 falls or rises by 10% next month.
- A loss and a decline is different. So you haven’t lost money if your account is down unless you panic sell
- Financial pundits aren’t any better than the average man in the street at predicting markets but are often afraid to just tell people the same old boring buy and hold advice.
- There are so many unknown variables that being long-term and diversified is the safest bet.
- If markets ever do go down a lot, that simply readjust the long-term return exceptions higher.
So given all those facts, there is no safer long-term strategy than to invest monthly, or at least during different time periods, in stocks and bonds.
In other words, investing for decades, regardless of whether markets are going up or down.
It is a boring but effective strategy which has never failed in the past.
One of the most surprising ones is this. Money doesn’t automatically make money.
Most people believe in expressions like this:
However, it isn’t always true. Look at the richest people on most rich lists.
Most aren’t inherited wealthy and the stats below show that too:
Look at your own network. I would be willing to bet there are loads of people who have wasted money and became broke.
I literally know tens of former millionaires personally, even though in theory money should make money.
The biggest reason? Divorce, complacency, arrogance and not preparing for the worst case.
Worst cases like a global pandemic hitting their business hard. So there is a reversion to the mean.
Over-performance doesn’t usually last in business, just as it doesn’t in politics or any other discipline.
So to maintain wealth, you always need to factor in the chance that your income will dry up and ask the right questions.
Just because somebody is earning 500k+ this year doesn’t automatically mean they will do the same next year, let alone forever.
Most people, however, assume the past will repeat itself. So poorer people lose confidence and think the game is rigged and many wealthier people get complacent.
The sensible person makes sure they have private wealth. The old expression “fix the roof when the sun is shining” is still relevant today.
This answer was asked during the worst of the crisis. What has happened since should remind you not to take notice of anybody trying to predict markets like some of the people below.
The market has recovered well, but nobody could have predicted that. Markets could have gone up or down after the big falls in March, like they could go up or down tomorrow, next month or next year.
All we know is:
- Buy and hold works
- Nobody can time markets
- Invest every month to decrease your risks
- Unfortunately, saying the same thing over and over again isn’t profitable for most pundits. The founder of Vanguard Jack Bogle speaks about it below. What he is saying is that most people love stories, expect activity and other things from pundits and advisors. In fact, the “do nothing” advice is often the best advice.
Let’s face it though, unless you have some gravitas like Bogle before he died or Buffett, who would invite onto their show the kind of person that is giving the same advice every single day for decades like Bogle did with his buy and hold mantra?
Entertaining advice isn’t always profitable. Boring advice is as Soros says below:
I know it sounds counter-intuitive and too good to be true in some ways. But the academic evidence is clear on any large study that has been done.
Doing nothing for decades, once you have set up your direct debit for your investing account, is more profitable than watching CNBC and other media outlets and being active in general.
Less stress as well! Look at any 30–50 year graph of the major stock markets like the S&P500, Dow and Nasdaq.
The pattern is clear. Dramatically up long-term with some awful periods. We can’t predict those terrible periods.
So best to just invest and forget about it.
This question was asked in March. If you were a first time investor during the crash of March 2020, you were very lucky.
You were buying the markets when they were on discount. You would now be up a lot, although you shouldn’t be afraid of stagnating or falling markets.
Lower prices, for longer, are good for the long-term investor provided that you are:
- Long-term. As the graphs show below, the longer-term you are = the safer it is:
2. You are diversified between stocks and bonds. When stocks are down, bonds usually outperform. So this year, bonds have done better than stocks for the most part.
3. You hold the whole market and not individual stocks or you keep individual stocks down to 10% of the total
4. You hold 3–4 indexes, such as the S&P500, a worldwide index, a bond index and maybe something like tech or emerging markets (10%).
5. You don’t time markets. Instead you buy for decades.
No two crashes are the same. Same with this time. In 2008, it took a few years for markets to recover to where they were.
The Nasdaq has already recovered, with the S&P500 and Dow coming within 10%-17% of their respective peaks. Some European and emerging markets are lagging though.
Each big decline is slightly different:
Nobody can ever know for sure how investors, regulators or governments will react.
That is why timing the market is near impossible because each time, people react slightly differently.
If the same policy mistakes that were implemented in the 1930s came about again, that would likely lead to a very different situation for markets and indeed the economy.
Markets have historically gone up during recessions, shutdowns and virus, including during the Spanish Flu pandemic and WW1 (1918–1920) happening at the same time.
They have also gone down during numerous periods of stability and prosperity. So the answer isn’t to try to predict what will happen.
The best option is to hold a diversified fund like the total stock market exchange, S&P500 or indeed a life strategy funds which combines stocks and bonds in one index.
For example, Vanguard Life Strategies which hold several positions in the same fund:
If you want to hold one stock, which isn’t recommended, pick one which is also widely diversified.
For example, Berkshire Hathaway’s holdings are such that the stock is indirectly more diversified than the Dow Jones index!
I would avoid most individual stocks and be very careful though. It is far safer to own everything/the whole market.
That way, if 1–2 firms go bust, they are knocked off the index and replaced by other firms
So you don’t have “company risk”. You only have “market risk” which isn’t much of a risk if you buy and hold for decades as per this chart:
With individual stocks you have both market and company-specific risks and unlike holding the index, you can’t say that most big firms will be bigger in 20–30 years.
Historically whilst the indexes have gotten bigger over time, most big firms eventually struggle.
Look at the big banks, GE and some of the airlines. Some have never recovered even though the general market always has.
I am sure 2020 won’t be different. The main indexes will recover and the Nasdaq already has.
However, some individual names will go bankrupt or never recover, like some of the airlines.
As much as I am an advocate of the whole digital economy, and it is clear that we have been moving in that direction in the last 10–20 years and the virus will fast forward it, be careful with expressions like:
- Things will never be the same again.
Remember 9/11? Many people said even traveling would go online. It took a few years, but it came back:
In fact, inbound tourism in Asia has grown much more, with the ever increasing middle classes flying more.
Look at Thailand’s numbers before covid:
So business going online? Yes. I have done it for years. When I am the buyer, the last thing i want to do is meet somebody face-to-face.
Offices, ties, suits and face-to-face meetings which can often be pushy, is very old fashioned and most people don’t enjoy it.
So certain types of office buildings, business travel and some other things might never fully recover.
But some things can’t be done remotely. I cancelled a safari this year due to the virus-related restrictions.
I will go again in 2021. A “virtual safari” isn’t quite the same…..
In 2–10 years, i think tourism will be much bigger than it was in 2019.
I think you know the answer to this question deep down. Does Bitcoin:
- Pay dividends? No.
- Have a coupon? No.
- Have business earnings. No
- Is it based on innovation and the survival of the fittest like stock markets such as the Dow Jones, where the younger, fitter companies “knock off” the older companies off the index? No.
So it is just based on hoping that the person coming after you, will pay more for it than you paid.
That is a speculation not an investment. The founder of Vanguard, Bogle explains it best here:
And here on Gold:
Currencies, including digital ones, and gold aren’t even investments. That doesn’t mean they can’t go up though.
They are merely based on hoping that somebody else will pay more for it than you paid.
That may happen or may not happen. That doesn’t make them investments though.
There is a basic equation to wealth for most people:
- How much you earn after tax (net income)
- How much you spend. So 1–2 = your surplus
- What you invest in and for how long
So net income – expenditure x compounded net investment returns.
- David earns an average of $60,000 throughout his life. He invests $500 a month and gets 8% per year
- Sarah earns the same as David but invests $1,000 for 10 years getting 10% a year.
The results? David has $1.7m and Sarah 200k! Quite a difference.
But get this. Imagine David puts in a 100k inheritance in year one and also the $500 a month.
He is now worth $3.8m! So 1.1m more for adding 100k more! The reason why I mention this, is everybody is looking for hacks but sometimes simplicity beats any hacks as per this quote:
More specifically, what can you do? These things increase your chances:
- Live below your means. Don’t take things to the extreme but avoid just spending more as you earn more in your 30s and 40s.
- Take advantage of your 20s. It is socially acceptable and fun in your 20s to live with friends. It isn’t as fun when you are 35 to flat share. You can therefore have more fun, and save and invest more, when you leave university
- Get a degree in a good subject. But also learn things on the side like languages, marketing or any other skills that can monetise
- Read a lot. University is the start of your learning process. Not the end. Have a growth mindset and not a fixed one
- Focus on big actions, scale and keeping up with business trends
- Associate yourself with people better than you and avoid toxic people
- Focus on 1–2 things
- Avoid excessive amounts of drugs, alcohol and anything else which can distract from that focus
- Get a job. Get good at it. Then start a business. Not the other way around. Get experience first and then look to make it a scalable income.
- Once you have a scalable income, the process of wealth becomes quicker, as long as you don’t spend it all!
A scalable income + reasonable spending habits + good investing habits = a big chance of success.
Even if you want a “normal” job you can get wealthy slowly from regular investing and starting the investment process early.
There are people who are unemployed with all kinds of majors from university.
Likewise, there are people earning 6 and 7 figures from all kinds of majors.
What is true is that the majors you study have a big impact on average earnings for the first few years:
Those that specialise early earn more on average for the first 3–10 years, and especially the first 3–5 years.
Sometimes peaking too early isn’t great. One of the weakest students from my year group got a 2:2 at university which is the second from lowest grade.
He was unemployed for 1–2 years after university. After 5–6 years he was earning 100,000+ Sterling a year.
He found his stride working in technology-linked finances. He was a very approachable guy, who many underestimated, who ended up doing well.
Same in business. Some people peak early, and others blossom later.
University and professional qualifications aren’t the be all and end all.
Those that really succeed see university as the starting point and lifelong learning as key.
The difference between going to a community college and Oxford or Harvard isn’t as great as it used to be.
Most of the best business people read a lot, or use audible if they don’t like reading
The important thing is just not to waste your 20s. If you go to a job interview at 23, 25 or even 27, people will understand if you have wasted time.
If you have done noting with your degree at 30, you have less options.