The following article will list some of my Quora answers for the week.
Do you think Amazon will hit a price of 3,000 this year in the stock market?
I don’t know and nobody truly knows. All we know is:
- Today’s winners have always eventually became tomorrow’s losers in the stock market. GE was once so mighty that the US Government considered breaking them up. They needed to be bailed out 12 years ago and that is just one example
- Today’s winners can continue to be winners for a considerable amount of time.
- As more money is going into the indexes, Amazon and the other big tech firms are benefiting from that.
- The move towards a fully digital world, which was happening before the crisis, will probably accelerate
- There will be a lot of political pressure to break Amazon up and claim it is a monopoly
- Unlike Tesla and some other tech firms that aren’t profitable, Amazon is of course a money making machine
- Despite number 6, it’s price to earnings ratio is quite high. Tech in general is high:
- Even if Amazon does continue to outperform, it is safer to buy the whole index (Nasdaq), take a FAANG position to include other stocks like Netflix, or buy it and keep it as 10% of your portfolio
- It is possible to get wealthy slowly with a more conservative strategy than buying individual stocks
- Nobody can see the future for sure.
So it is about balancing many things – good risk adjusted returns are more important than returns alone.
There are many arguments in favour, and against, Amazon continuing to outperform.
So I wouldn’t put the lions share of your portfolio in Amazon or any one stock.
This time might be different but those are dangerous words. Look at Berkshire Hathaway.
One of the few sticks that outperformed for decades, consistently, under Buffett.
Many people invested in it. In the last 10 years, it has struggled against the S&P500.
Often it isn’t easy to spot which stocks will be tomorrow’s winners and that brings many late comers to the party + many of the people already at the party assume that luck played no part in their original investment.
I would index with 90% of your portfolio and with the other 10% have some “bets” if you, like most of us, have that gamblers urge inside of you.
What lesson about money would you give to somebody half your age?
Here are my top 20:
- Don’t think it is too early. In many places kids are encouraged. not to learn about finances. Most aren’t taught about money, seriously at least, at school or by parents. Some people even have this idealised version of youth and being a teenager that it is better “to be young” as if finance can’t be interesting. I have found most teenagers at 16–19 in particular to be very interested in handling money, because they have often started their first part-time job.
- Don’t think you need to be rich to start investing – if you have a part-time job, these days you can start with $10, pounds or Euros a month. Just get the process started. $5 a day is $150 a month and is a latte a day. If you get into the habit of investing early, the process of compounding is quicker. It is 5x easier to get rich investing if you start small at 18 than big at 50!
- Get a formal education – but also focus on self-education. Enjoy your free time at college and university but also learn important life skills. Read a lot outside your degree course.
- Take as many risks as you can – calculated risks when you are young enough to do so. Don’t be fearful of losses when you have little or nothing to lose. You won’t regret “losing” 1k at 30, 35 or 40 on that business idea. You would have spent it on nights out anyway!
- Learn about leveraging your time – and the time of others. Ask the right questions. For example, how it is possible for person a, who is no more talented than person b and doesn’t work harder, to earn 20x more perfectly legally? Often scale, leverage and working smart at the keys alongside working hard.
- Get a job after university – get good at it and then start your own thing unless you can make something work as a student.
- Focus. It is probably the number 1 component of success if you combine focus and persistence. Focus on the important things
- Focus on what is important – read this book. It will give you some perspective. It is indirectly linked to personal finance if you think about it long enough after reading the book.
9.Don’t show off – nobody is thinking about you anyway. It just makes people broke as well. This is the number 1 reason why many high income people are broke. They earn more as they get older but don’t spend more. Remember this quote:
10. Don’t worry about scandals. Following on from number 9, today’s scandal is tomorrow’s fish and chip paper. It comes and goes. Therefore, don’t be afraid to take risks. If you offend some people it will blow over. You only need to impress a small number of people in life.
11. Play the numbers game. Want a job? Keep applying for thousands. Same in anything in life. Be persistent and play the numbers game. As a private business owner, you only need to get lucky once as Mark Cuban said.
12. Don’t care about fairness all the time – life isn’t always fair. There are many profitable things in business which aren’t fair for you, but will be profitable for you. Don’t react too quickly to offers that seem unfair. Have a coffee, think it over, and then come to a conclusion.
13. Learn languages – whilst you have the chance.
14. Take care of your personal finance – it will indirectly help your finances. This means physical and mental health, so includes things like looking after your relationships
15. Don’t be in a hurry all the time. If you quit university to move to another one, like I did, it really doesn’t matter. If you graduate at 21, 22, 23 or 24, it won’t matter that much when you are 30+.
16. Don’t be untrusting – but don’t be naive either. Strike a middle ground. Most people are either naive (maybe 10% of people) or too cynical (50%+ of people). Few have a middle ground and it clouds our decision. Simple example. Studies have showed that complete strangers are more likely to pay us back then our close friends! They have a 80%-90% chance of paying us back but most people assume the answer is 50%!
17. Don’t be influenced by “familiarity bias” – many people make decisions based on what is familiar. So they invest in gold because it is cultural familiar (India) or in property (UK, Singapore, Malaysia etc). Beyond money, be whoever you want to be, without being influenced by what is normal. If you want an extraordinary life, you need to make extraordinary decisions. So break as many cultural, societal and business rules as possible.
18. Always adapt yourself – what worked in 2015 doesn’t always work in 2020. What works in 2020 might not work in 2025. So keep reading and learning after university, and try out new things.
19. Never become complacent – when success comes. Pride comes before a fall.
20. Spend at least a couple of years overseas – you will learn more regardless of your nationality.
Can you retire with 1.5 million comfortably?
It depends where you live. As one of the contributors has said below, 1.5m = $60,000 assuming no extra government support or income.
In some parts of the world $800 on rent gives you this with minimal taxes:
In some other places it gives you this at best:
You can live like a king in some places for 5k, and be struggling in some expensive cities.
All depends on where you live, your lifestyle and if you have dependents.
A great example is health insurance. In the US, health insurance in old age can cost much more than in some other places where it is either free or discounted.
What I would do is work out the following variables:
- Where you want to live and what would be a reasonable budget for that area
- Add inflation into the mix including your own personal level of inflation. If general inflation is 2%, it might be 5% for a retiree if you live in a place that requires private medical insurance. Also work out if you foresee your circumstances changing. Some people see their living costs fall after a few years, for example, because they have already done a lot of it in the early years of retirement.
- What you are invested in now and how you can optimise that pot during retirement.
What’s wrong with a credit card if I pay it off every month?
There is nothing wrong with it. In fact, in some countries especially with American Express and others, you can get a lot of free benefits.
This includes free miles:
In fact, even some frugal bloggers, who have gotten wealthy from living well beneath their means, advocate using credit cards in this way.
I have used a credit card for years, so I am not anti-card, although I use debit cards more.
It is always good to have numerous cards in case something happens to one of these cards.
I have lost count of the number of times I have been overseas, and my bank has put a hold on my account, or I have lost the card somewhere in my luggage.
The problem is, few people have the self-control to actually do this.
Studies show that people spend around 5% more, subconsciously, on card compared to cash.
Spending is easier when you don’t have to physically give out pieces of paper.
Doing that feels much more real and painful to many people, at least on a subconscious level.
To find out if this applies to you, use your card for one month and then use cash only the next month.
Don’t budget or try anything conscious and see if you spend significantly more on card.
If you don’t, then the conveniences of card really make sense. If you spend more, consider getting rid of the card or at least use it as less as possible.
Ultimately, one of the biggest financial mistakes people make on all income levels, is living above their means.
Cards make buying stuff easier. So people are more likely to spend at midnight online compared to if they have to wait until 9am to go to the store.
The card companies know these facts and encourage it with minimum repayment amounts which makes it all too easy to get into large debts or at least overspend.
Many people who analyse their credit card statements are often amazed about how much money they spend on items that they don’t especially like, and would never buy in a physical shop.
These impulse purchases can be reduced for many people by using cards less.
What is the best way to make a million dollars?
That is a very broad question which I will need to break down. I will assume your question isn’t moralistic, and speaking about the best way morally to make $1m.
If your question is about morals, then of course everybody’s answer will be slightly different.
Some will say a new invention to cure cancer, and others will say spreading the gospel or something like that!
I will assume you mean what is the easiest way, or most efficient way, to earn one million dollars.
Here is the stark reality. Everybody, or almost everybody, wants to make and earn money.
Therefore, if something was easy, both emotionally and from a technical point of view, everybody would do it.
This quote says it all:
If something is hard, then others won’t copy you as easily, as they aren’t willing to do the hard yards.
With that in mind, there is money in being willing to do things that other people won’t do.
That includes a wide range of activities including:
- Being willing to work 18 hours a day
- Doing dirty jobs, regardless of whether they are skilled
- Being willing to live below your means for decades to build up your wealth
- Taking more calculated risks than others
- Taking tough decisions like changing your country of tax residency to lower your taxes.
- Being willing to make unpopular decisions
Often the best way for most people is to focus on their day job. The world is competitive.
The statistics are clear. People in their 30s, 40s and 50s are more likely to be successful in business.
The reason isn’t merely wisdom but that it is easier to get a job, get good at it, and then start your own thing.
People focus on the idea, but implementation counts. It is easier to implement if you have first gotten experience.
If you are a chef who becomes a restaurant manager, you are more likely to succeed compared to somebody with zero experience in the catering industry, especially if you learn additional skills like accounting and marketing.
This works especially well if somebody combines their existing experience, learns new skills and focuses on leverage/scale.
So let’s give a simple example. Somebody has a lot of experience in restaurants.
They learn digital marketing and some new skills and then set up an online component of their new business, which means they can scale more easily.
Now let’s break the question down further
Earning $1m in one year is different to other 10–20 years. Many people in high income countries earn $1m over 10 or 20 years.
There are also two forms of income:
- Earned income – from work, salary and your job
- Unearned income – from investing or if you have done a one time job. So if you have spent 1 hour putting a video online and it keeps monetising 10 years later, it is in many ways a form of unearned income.
Realistically, you need to find a way to not just work for money. Working hard is important but working smart is even more important.
If you learn to leverage time (other people’s time and compound investment returns as two examples) and money (leverage) and other things, you are more likely to earn more than if you focus on more hours worked.
Again though, you might have to have a step by step process. For example:
- Get a job
- Get good at it over a number of years
- Start your own business in that area you are experience in and build it up through hard work. Invest money on the side too
- Once your business is established and successful, and you have reached the point where you won’t earn much more from more hours worked, focus on systematising the business through scale and leverage.
Many people focus on running before they can walk in business
. If you aren’t interested in business, the easiest way to get wealthy over a period of time is leveraging time and other people’s business ideas through stock market investing.
It might be volatile but markets outperform other investments long-term as any long-term graph will show.
Why is the stock market so disconnected from the real economy right now?
I watched a good video from the Economist a few days ago:
Their argument goes something like this. In the 1950s, most stock owners were ordinary people.
So if people were feeling the pinch, they invested less, or even withdraw funds, and stocks fell.
When people were feeling optimistic and had more money, the markets would rise.
These days, about 80%-90% of the markets are owned by institutional investors like hedge funds and banks, and many of the rest are richer people.
That is because even though more than 50% of Americans and some other nationalities own stocks, of course richer people own more.
Therefore, as a result of this, if richer people and especially institutions invest, then the whole market can go up.
Because lockdown has affected lower skilled workers more, most of whom don’t own stocks or very few, the markets are now disconnected from the real estate.
It isn’t a bad analysis and indeed the rise in institutional investors is one reason for this trend.
However, my main issues with the analysis is:
- Stocks have always been disconnected from the real economy up to a point, They have more been like cousins, loosely related, rather than siblings.
- In recent times the Chinese market, the Shanghai and Shenzhen indexes, have gone against this analysis. The Mainland China markets are similar to how the US markets were in the 1950s. More smaller investors and fewer institutional players, unlike Hong Kong which has more institutional investors. What has happened? The market has been more volatile than the US, as you would expect, because individual investors are more prone to emotions. So the Chinese markets has soared sometimes,, and fell hard, at other times, to a much greater extent than most markets. However, from 2006–2019, the Shanghai Composite was one of the worst performing stock markets in the world despite impressive GDP results. However, it has finally had a good year in 2020, despite the Chinese economy struggling like the rest of the world. So this goes contrary to the Economists analysis.
- Stocks can go up and down for any number of reasons. There are 8–9 billion people globally, and tens of thousands of institutions. With so much data and emotions, markets can go up or down on any number of reasons. They have risen during recessions, wars, pandemics and fallen during the exact same events. Sometimes they even panic fall and then rise in the same day (after Trump’s election for example).
- Following on from number 3, markets aren’t stupid, but they aren’t always rational either. They are dominated by speculators speculating on what other speculators are speculating about in the short-term. Long-term, the cream does tend to come to the top.
- The graph below shows the lack of correlation between GDP growth and the stock market over the last 100 years. Countries like South Africa and Australia have outperformed as an example.
There is little connection between growth and stock markets. Look at the last 25 years.
There doesn’t always need to be a grand reason for market movements.
But let’s face it, no news channel would lead their analysis by saying “markets have fell today because……well we don’t know actually”.
So people need to hear stories to keep them tuned in.
Would it be wise to have a 100 percent equity allocation and none in bonds in a 401k?
This answer is for all investments and not just 401Ks. The short answer is that it depends on:
- Your age
- How long term you are. That isn’t always linked to age
- How you react to volatility
Now let’s deal with the last point first. It is true that long-term, stock markets outperform bonds as the graph below shows:
Not only that, but the days of bonds paying 6% are over for now.
So previously it was 9%-10% (6.5% real) for stocks vs 6% (3%) real for bonds, with stocks being more volatile.
These days, bonds aren’t paying that kind of money, which means you should consider having a higher stock allocation.
The big negative for some people of a higher stock market allocation is events like this:
Stock market crashes. Look at Quora and how many scared people there were in March and April.
In comparison, when markets are high, people are calmer, which is the issue.
So if you can deal with the huge volatility of markets, being 100% in stocks and 0% in bonds through your 20s and 30s, makes sense, provided you can:
a). Stay calm
b). Increase your bond allocation after 40 or 50.
The results below tell a thousands words:
Bonds pay less than stocks long-term, but because they outperform during the worse times like 2008 and Mach of this year, that gives you a rebalancing opportunity and decreases your chances of being down over even a 5 year period.