TOP QUORA ANSWERS THIS WEEK – PART 2

This article will continue the rundown of this week’s top answers on Quora.

What is an unusual but safe long-term investment that will grow in value?

If you define unusual as something which most people haven’t heard of, I would say real estate investment trusts (REITS).

They aren’t unusual for people in finance, but they are less known to the general public compared to indexes, individual stocks, conventional property and even gold.

REITS are forms that own or finance income-producing real estate across a range of property sectors, such as commercial and residential property.

There are many types of REITS but they have performed well over-time. Take the VGSLX – Vanguard Real Estate Index Fund Admiral Shares as just one example of many.

It has performed well over the medium and long-term:

What’s more, REITS tend to sometimes outperform stock markets during certain periods of time, and trail during other periods such as 2020.

So studies that have been by Vanguard and others found that having 10% in REITS can slightly increase your returns and lower the volatility of the portfolio.

Usually less volatility means lower long-term returns, like if you invest in bonds even when you are young and don’t need to fear volatility.

So the fact that REITS can be held in the same portfolio as bonds and stock indexes is a bonus.

If one performs better than the other, you can just rebalance. For example, let’s say you have 10% in REITS today.

In 2021, REITS have done better than stocks, so the REITS are now worth 13% of your portfolio.

In this situation you can just sell a small amount of the REITS to keep the 10% allocation.

Most REITS also have a 3%-4.5% dividend yield and unlike many stock indexes, haven’t fully recovered from the March falls.

Why is the stock market not a reliable source of income?

It can be a reliable source of income, but only after accumulating. Remember most of the world’s retirees are indirectly depending on the stock market for income.

The mistake many people make is assuming that there is an easy way to make significant passive income from an investment worth $10,000 or $20,000.

Below are the returns that the S&P500 and one of the few stocks to have beaten it for decades (Warren Buffett’s Berkshire Hathaway) have obtained.

If the S&P500 has “only” gotten about 10% per year if you reinvest the dividends (6.5%-6.7% after inflation) and Berkshire has gotten over 20% until recently, then what makes anybody think it is easy to get 30% every year…….

Many studies have shown that you can only realistically withdraw 4% from a portfolio every year if you don’t want it to run out.

That is called the “4% rule of retirement”:

The reason for the 4% figure despite the previously mentioned 10% average returns for the S&P500 is because of:

  • Inflation
  • A conservative buffer just in case markets prefer less than expected. So the 4% rule has shown it can work even during extreme periods like 1929 or 2008, whereas a 5% withdrawal rate often doesn’t work in more extreme conditions.
  • An average stock market return is just an average. Some years and decades can be much higher than the average, with other years much below the average.
  • You need some bonds in retirement realistically and they pay less.

So if you want an income from investing in stocks you realistically need a two stage process:

  1. Accumulation. Keep adding more money and reinvest the income including dividends
  2. Then take an income when you want to stop working and you have accumulated enough.

It can be the same with other assets as well, including real estate. It isn’t like most people can buy one small house and just retire quickly.

So it requires patience and a long-term plan. The good thing is you don’t need large amounts of capital to eventually build up the pot to $1m or more.

Just a few hundred a month will eventually turn into $1m-$3m if you invest it right over a few decades.

Why is there such a wealth gap in the U.K.?

Before answering this question, I would like to make a distinction between wealth and income.

Do you know which countries often have a higher wealth gap than the UK?

Some Nordic countries! Yet those countries have lower income inequality.

People confuse wealth and income inequality all the time. Wealth is having assets.

The person that earned $500,000 and spends $500,000 or more isn’t wealthy.

There are plenty of people like that in the world. Just ask the scores of celebrities that go bust every year!

Anywhere to answer your question

  1. Even though markets and real estate can be volatile, they go up above wages long-term, especially in the case of major stock markets. This was Thomas Piketty’s theory in capital in the 21st century, which became very popular amongst liberals a few years ago:

Even though I disagree with his political leanings which were clearly to bring in a wealth tax, what he is saying isn’t a theory but a fact.

Namely, assets might be more volatile but they go up quicker than wages long-term

Wages have historically gone up by about inflation +1% or +2% once a country becomes developed.

Some years might be higher than others, or indeed lower, but that is the trend.

Assets are often inflation +4%, +5% or even inflation +6.5%-6.7% in the case of some major US Stock Markets.

That is nothing over 1–2 years. Compounded though and that difference is huge.

Therefore, as wealthier people are more likely to invest in assets that appreciate over time, they will gradually get wealthier than somebody just relying on income.

Simple example. Let’s say in 1990 a person invited $100,000 init the major US indexes like the Dow Jones, S&P500 or Nasdaq.

That money would now be worth about $1.2m-$1.5m depending on which index you invested in and if dividends were reinvested.

So these things build up over time.

2. The absence of any world war. When was the last time inequality went down? The period from 1929–1945. Why? A Great Depression which was deflationary and hurt asset holders + a second world war in the same generation.

3. The education system. In most British schools, kids are taught poor habits and that it is “the taking part that counts”. jKids of the rich are more likely to be taught better habits and how to compete, if they avoid state schools.

4. Labour has gotten weaker relative to capital since the fall of the Berlin Wall. This is a worldwide issue and makes the first point even more potent now.

5. Technology. In recent years technology has affected lower-skilled labour.

6. A lack of a political response to issues like unaffordable housing in the south.

Finally there has been a wrong response from many people. Countless people are looking for the wrong answer, like a return to the 1970s, more tax and regulation etc.

In the last 10–20 years, I have seen countless British people (and from other nationalities) improve their lot.

What was the commonality between those people? Taking action.

That could be radical action like emigrating for a better job, or something smaller like investing more by making lifestyle sacrifices.

Either way, those looking for politicians to improve their lot are making a mistake.

Does being afraid of losing money make you poor?

It depends on something more specifically – how rational is the decision making process?

Some examples. If you are afraid of losing all your money by spending 101% of your after tax salary, getting into credit card debt and ending up in the streets that is rational!

Although funnily enough many people don’t process this as a loss like they do if they have been scammed.

I was speaking about this issue to a client a few years. We were speaking about a mutual acquittance.

He had just lost 2,000 Pounds ($3,000 at the time) from making a bet on a snooker match.

He didn’t seem unhappy about that but he was furious about being scammed by some real estate agency.

However, if you look at this rationally, he should be equally upset by both.

The losses were about the same. Now sure, he knew what he was getting into when he made a high-risk gamble on snooker!

Nevertheless, from a purely rational basis he should be equally upset by both.

Likewise, many people aren’t clear what risk is. Countless people think if something is volatile, that is risky.

It isn’t true.

Who is taking more risk in these situations?

  1. Person A that has a job paying $5000 a month
  2. Person B that has 2–3 jobs, paying between $3,000-$7,000?
  3. Person C who is investing in stocks and bonds for 40–50 years
  4. Person D who keeps money in a bank account?

Clearly person B and C are taking less risks than person A and D.

Person B isn’t relying on one source of income. Person B is investing for the ultra long-term in a diversified portfolio that has always beaten cash historically.

In fact not just beaten, but ran rings around it. In comparison, Person A and Person D are afraid of volatility.

That doesn’t mean they are taking no risks. Person D is almost for sure going to loss to inflation and other investments. If Person A loses his or her job they might be screwed.

Yet many people think “having a stable job” or keeping cash in the bank is less risky than alternatives.

Finally, a distinction needs to be made between calculated and silly risks.

Changing your job that you hate might be a good calculated risks because doing nothing is also a risk.

Investing for 1 day is ridiculous. It is speculation. Investing for 30 years is not only a calculated risk, but less risky than keeping money in the bank.

So it depends about how rational the decisions are. Ultimately, there is no such thing as no risk.

Doing nothing in life has its own risks. Often though they are hidden, and we only find out about them later.

For example, if you suddenly lose your “stable” (which in reality just means no volatility) income due to lockdown, you all of a sudden wish you had been like your best friend that diversified their income sources 5 years ago, when you thought doing so was a risk.

Finally, it depends at what point you are at in life. If you are a 35 year old with an autistic son at home you should be careful! If you are a multi-millionaire at 70, why take too many risks?

But if you are a single 21 year old who is living at home, you should take risks when you don’t have much to lose.

You won’t regret losing $1,000 trying something 40 years later at that age.

In general, I have found wealthier people more likely to take calculated risks.

In many situations, refusing to take calculated risks can ensure people will remain poor, because indirectly it leads to many hidden risks building up and opportunities going away for good.

Is Apple stock overvalued or undervalued?

Apple is now worth $2 trillion. It is worth over 4 times what it was 5 years ago and 10x it’s 2010 value.

Is Apple making 5–10x more revenue and profits? No. It’s average revenues are increasing by just over 10% per year.

It’s price to earnings ratios have became more expensive over time due go this fact.

The rally partly reflects growing confidence in Apple’s shift toward relying less on sales of iPhone, and more on services such as video, music etc.

There is also the reality that lockdown has pressed the fast forward button.

We were always moving towards an new digital age. We are merely going into that direction more quickly now.

The reality is this. A professional investor like Warren Buffett would say Apple is probably fairly valued.

He is holding onto his stock for rational reasons, at least at these values.

Then there are the majority of DIY investors. They buy on emotion and justify it based on logic afterwards.

Studies have shown that people are more likely to own Amazon stocks if they live near the warehouse, or Apple if there is a store nearby.

So most of the individual investors buying Apple aren’t that concerned, deep down, by how overvalued it is.

So I will partly sit on the fence and say there are arguments in both directions, and fairly valued might be the best answer.

Just don’t expect individual investors, especially smaller DIY ones, to buy on logic.

I spoke to a friend who bought Apple again recently. I say again as he panicked a few months ago during the market crash, despite the fact that Apple’s P/E ratios looked cheap back then and he bought years ago.

Now he regrets it and knows what he did. Always remember controlling emotions is always more important than technical analysis for most investors.

If you buy Apple, or especially the whole Nasdaq index today, you won’t regret it if you hold onto it for 30 years through thick and thin.

If you buy, sell and buy again, and keep stock picking on emotion, you might have regrets.

Just keep to a well-balanced , long-term, strategy and you will do fine.

Avoiding speculating on what other speculators are speculating about to quote the Vanguard founder Jack Bogle.

This quote says it all:

I keep losing money in the stock market. Should I quit?

I would more focus on how you are investing. One of Warren Buffett’s least known quote is (I am paraphrasing).

“Stocks started the century at 60 and ended at 11,000. How did people lose money during such a period? They tried to dance in and out of markets”.

And markets have almost triple since then, if you factor in dividends at least.

At the end of the day, stock markets do eventually hit record highs.

The S&P500 hit one again yesterday. The Nasdaq has been hitting new highs every few weeks.

Now sure, markets don’t hit record highs even week, month or even every year.

Sometimes they can be stagnant for 10 years or more. Look at the Nasdaq from 2000–2016. 10+ years of stagnation if you bought at the top.

Nevertheless, record highs happen often:

Closing milestones of the NASDAQ Composite – Wikipedia

Closing milestones of the S&P 500 – Wikipedia

So the best way to overcome losing money is:

  1. Just invest in the indexes
  2. Stop trading on emotion
  3. Do number 1 or employ an advisor that can help you control those emotions
  4. Reinvest dividends
  5. Never time markets
  6. Never stock pick or just keep 10% of your portfolio in individual stocks
  7. Don’t panic sell during market crashes
  8. Switch off the news media that often exist to sensationalise and make people fearful or greedy
  9. Have a simple buy, hold and rebalance strategy based on government bonds and stocks.
  10. Never change your strategy.
  11. Every time you feel emotional about volatility , look at the two links above showing the historical trends.
  12. Invest monthly to reduce risks
  13. Work your way backwards. Let’s say you can afford to invest $500 a month as a pure example. Find a calculator online that shows you how much your money would be worth today if you would have invested for the last 30 or 35 years. The past isn’t always a guide for the future, but it will make you more relaxed about any future volatility.

Having a simple strategy will beat a complex one, if you can keep to the strategy through thick and thin.

What often happens all too often is people “pledge” that they will stick to a long-term buy and hold strategy.

But then there is a market crash, or they watch a video online saying indexes are a bubble, and suddenly they are changing what would have been a winning strategy.

What is one of the strongest predictors of income and wealth in later life?

It is interesting but a study was done which looked at the biggest indictions of wealth in old age.

I once heard the radio host Dave Ramsey takes about this study on one of his videos.

I believe the investment company Vanguard did this study.

The researchers looked at all the variables possible including:

  • Your income
  • How competent an advisor is
  • How skilled and knowledge you are about stocks and finance
  • Fees
  • Returns in percentage terms
  • How much you invest
  • How long you invest for
  • If you picked a specific stock or saw certain trends
  • Many other variables
  • Inheritance

Do you know what was the biggest indiction, or two leading indicators? How much and how long people invested.

Sounds so simple but it is common sense. The person who invests $2,000 a month for 40 years getting only 5% (a full 5% less than the historical average of the S&P500), will still have more money than a person who gets 12% for 10 years investing $500 a month.

The person who invests $500 for 40 years getting 6%, is going to have more in cash terms than the person who invests $600 for 15 years and gets 10% yearly.

And yet people often over-analyse investing. Of course, ideally you need 3–4 things working in tandem: invest a reasonable amount for a long time, plus get good risk-adjusted returns.

However, if you stick to the basics of just investing every month for decades, and investing a reasonable amount, you will do better than somebody who tries to be too cute.

Most people tend to try to time the stock market. So many people tend to exit during periods like 2000, 2008, March 2020 etc.

I think that is one of the biggest reasons for the results of the study.

Even though everybody claims they know that long-term investing is best, few do it.

So those people that invest for 30, 40 years are the last man or woman standing.

Most of their peers tried to be too cute, or had very bad money management skills, which meant they couldn’t invest much.

The old saying that 80% of success is just showing up is also true with investing:

If you are ever out of the market, you aren’t showing up, you can’t reinvest dividends and so on.

What do you foresee in the future of investing now after coronavirus?

Nobody can foresee the future, but what do we know? We know the following facts:

  1. Governments have been aggressive. QE and 0% interest rates. The last time they did this after 2008–2009, it produced next to zero inflation in the real economy, but created a lot of asset price inflation. Stocks indexes in most countries did better than their historical averages. Just because it happened before, doesn’t mean it will again, but many people are looking for places to put their money.
  2. The markets have always beaten cash long-term – in fact run rings around them

3. Past prediction are no indiction of future right predictions. Remember 2008–2009. Very people predicted it. Those that did, like Peter Schiff and Roubini, got the next predictions disastrously wrong. Schiff thought gold would hit 5k, and silver $100 (sound familiar anybody….). Roubini said on CNBC that cash is king. Likewise, this time, few people predicted lockdown. Those very few people that did were busy predicting more doom and gloom in March and April! The same people predicting that stocks will crash after the US Election, are the same people who thought the same in 2016. Remember this quote about the media from Steve Forbes, the owner of Forbes:

4. Nobody can consistently time markets. I know a lot of people who are finance pros. I don’t know one person who has demonstrated that adjusted for fees and costs that they have consistently beaten the market over a 20 year period. I don’t even know anybody who knows anybody who has done this! The founder of Vanguard, Jack Bogle, said the same thing, and he knew thousands of hedge fund managers. If people like that exist, they are 0.1% maximum! Peter Lynch says it right below:

So what can we gather from those 4 things?

Well:

  1. As nobody can time markets or foresee the future, it always makes sense to invest today. Nobody can know what tomorrow will bring. We just know that historically markets have beaten other investments
  2. The only predictions I will make are this. Those people that switch off the media and don’t try to predict the future, will do better than those that try to be too cute. Plus those people that invest every month for decades without trying to time markets, will beat almost all investors that try to be too cute and smart.

So I don’t think the future of investing will change. The fundamentals of good investing, including good asset allocation and never timing markets, will always remain the same.

This year has proved that once again.

f someone has no experience investing money, what is your advice on the first steps they should do prior to investing and early on in investing?

Realistically, you can avoid most of the pitfalls of investing by:

  1. Reading and implementing
  2. Delegating to somebody who knows what they are doing

What is the biggest reasons why investors, newbies and even experts fail?

Lack of knowledge? Lack of ideas? No! Lack of implementation, especially during the bad periods. Emotional control is difficult in those periods.

Let me make a comparison for you. If you go to medical school and study nutrition in your spare time, it doesn’t guarantee success in terms of weight and health.

Only self-control can do that. That self-control gets harder after bad life events such as divorce, depression and losing your job.

That’s why even some doctors hire a personal trainer, for the emotional support:

In investing too, many more people these days know the basics because of the internet.

However, what usually happens is people don’t follow through. Like a person going to the gym who makes New Years Resolution and briefly feels motivated on January 1, many people start investing but then get into bad habits.

I can’t tell you how many people have told me that they have done things which they know, deep down, are silly.

Things like selling stocks during a crash, speculating on 1–2 individual stocks and so on.

So what I would do is read if you have time. Don’t just read pure investing books though.

Those books only focus on investing knowledge. Read some “behavioural finance” books as well like these ones:

If you start investing for yourself, watch yourself carefully during the first stock market crash.

Do you panic or stay calm? If you stay calm, maybe you have the emotional stability needed to invest by yourself.

If you panic you either shouldn’t be investing in the first place, or you need to delegate your investments to somebody that can help you.

Everybody says they won’t panic during a crash, but look at what happened in March.

Some early reports by companies have suggested as many as 30% of people sold out within a month in March and April! It is silly decisions like that which you want to avoid.

So if you want a step by step guide I would:

  1. Read if you have time. If you don’t have time delegate.
  2. After reading, ask yourself some questions honestly, such as “am I really emotionally ready for seeing big stock market swings”. If the answer is yes, try investing yourself. If no, try another route.
  3. Actually observe your own behaviour from an unemotional point of view once you start investing. See how you react to huge swings.

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