What are some harsh truths people should know before investing?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 264.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What are some harsh truths people should know before investing?
  • Will the stock market crash like in 2020 again?
  • What are the best ways to spend less? I discuss some of the tactics that can save money, without harming your quality of life.
  • Is it possible to invest so much in your 20s that you never have to invest even a penny or dollar from your 30s onwards? I look at the maths, and for that matter, practicalities, considering most people earn more in their late 20s and 30s.

Some of the links and videos displayed on the original answers might not show up on here, and if so, you will need to refer to the original answers to view that.

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below

What are some harsh truths people should know before investing?

Source: Quora

  1. Markets go up big time in the long-term. The Dow Jones went from 60 in 1900, to 2,000 in 1990 to 34,000 this year. The Nasdaq and some small cap markets have done even better. Therefore, if you are a long-term investor, and you are losing money, it is probably your own fault. You are probably market timing, stock picking, speculating etc. If you are down over a five or occasionally ten-year period, that is different, because markets can be stagnant for a period of time.
  2. Just because you know more about your company or industry, doesn’t mean you will be better at stock picking. There is zero academic evidence that doctors are better at picking pharma stocks, or people who work in big tech are superior at picking technology stocks. In this day and age, all information about stocks is publicly listed. Private investments and placements are different. The information isn’t available as easily, and only a few high-net-worth investors go into those kinds of investments.
  3. There is no zero risk way of getting high-returns without investing. Stock in the bank isn’t zero risk. Even if it wasn’t, it pays 0%. It is true that interest rates are higher in some emerging markets, but that has its own currency risks.
  4. You can’t outsmart the market by trying to time when to enter and exit. If you do occasionally make a lot of money doing that, it won’t happen consistently. I have met many people who profited from having money in cash in 2008 and 2020. I have yet to meet a person who has beaten the market over 30 or 40 years doing that. To quote Vanguard’s founder Jack Bogle, I don’t know anybody who knows anybody who has done that.
  5. Just because somebody is a great businessman, doesn’t mean he will be a great investor. Here is the aforementioned Bogle taking apart Mark Cuban’s comments in 2011 about market timing.

6. Doing more won’t always beat doing less in investing. Sometimes it does. You need to be proactive to get the account sorted out, adding money etc. Yet people assume they need to be proactive if there is a market fall, because this works in other domains. In reality, being more passive once you are in can be better.

7. You can’t know in advance of time, with any degree of certainty, which years and decades will be better than others. Now sure, you can take a calculated guess, like stocks might perform better when interest rates are low, but you can’t know for sure.

8. Future returns will be different to past ones. It is true over any 30-year period, returns start to normalize a bit. 1960–1990 and 1990–2020, had relatively similar terms if you adjust for inflation. Yet the returns you will get in the next ten years, are almost sure to be higher or lower than historical averages, and again nobody can know in advance if it will be a good or bad return.

9. Given all the facts below, it makes sense to invest asap, but do so in the knowledge that there are many unknowns, and you can’t control many of these factors.

10. Most of the things you worry about before investing never come true. The things you never worry about, like your own actions and behaviours if market crashes, are more likely to come true

Will the stock market crash once more like March 2020?

Source: Quora

If you look at the history of stocks markets in places like the US, UK and beyond, you will observe the following trends in the last 200 years

  • Stock markets do very well, even adjusted for inflation. The S&P500 has done 10% per year on average if dividends are reinvested, which is about 6.7% after inflation. Small caps and the Nasdaq have done even better. Doesn’t sound like a lot but the Dow Jones was at 66 in 1900 and hit 34,000 this year.
  • It happens a lot when markets correct 10%, 20% or 25%. It doesn’t happen as frequently that markets fall 50%, but it does happen, like in 2000, 2008 and 2020.
  • It is impossible to predict when markets will crash or do better than expected. People who predict one event will get the next one wrong. Hardly anybody thought markets would crash in early 2000. From those that did, even fewer saw the fast recovery.
  • The market will recover, meaning those who market timed will lose. People who invested through thick and thin will win long-term. As per the chart below, bear markets come and go:
  • Despite all of this, some people will still try to time markets. It always amazes me how people who have seen crashes like in 1987, 2000 etc still try to market time.
  • Falls, and crashes, look tiny on a larger term graph. Look at the history of the Dow or S&P500. The crash of 1987 now looks so small you almost need a magnifying glass to see it!

At the time though, it looked terrifying to some people!

The same with the crashes of 2008 and 2020. In 2045 or 2050, the falls will probably look tiny on a graph.

So, to answer your question, markets will almost for sure crash in the future.

In fact, they will crash on numerous occasions. Yet almost for sure, markets will be much higher in the future.

The Dow will probably hit 1 million in the lifetime of some people reading this, as Buffett and others have said.

The people who profit from higher movements in the ultra long-term don’t try to predict trends and be “cute” about when to get in and out.

What are the best ways to save money, and why?

Source: Quora

The best ways to save money is to do things which don’t harm your quality of life, or even enhance it, whilst spending less.

People assume you “get what you pay for”, but that isn’t always the case.

Some examples

  1. Commuting

Not everybody can work from home. Now everybody enjoys it, but even fewer enjoy journeys like this:

It costs more than staying at home or renting closer to the office, and wastes a lot of time.

Indirectly, things like office lunches and other related business costs all make a difference.

2. Brand names

In blind wine and cheese events, few people can name the brand names.

The same is true when it comes to Coca-Cola vs own brand.

3. Not working with human nature.

Why do people overspend? There are many reasons, but one is the path of least resistance.

We tend to do whatever is most convenient. Want to exercise more? Probably if you have home equipment you will do more than if you need to get dressed and go to the gym.

The same with money. Surveys have shown that people invest up to three times more, if they put a direct debit on the first day of the month after they are paid.

This quote says it all:

It is for this reason people can keep up with high mortgage payment. They just accept it like a bill payment and adjust elsewhere.

Some other tips

  • Use cash more than card payments. Studies show you can spend 5% less without even trying
  • Change your residency, or move to a cheaper place in your home country, if you can live at home. Why do so many countries have “golden visa” programs? Well in this online, digital and global world, many people have worked out that they can save a bunch of money on taxes and cost of living.
  • Don’t try to impress other people online with your consumption and “act rich”. Peer pressure is a big reason for overspending.
  • Don’t save loads, rather invest it and start investing at a younger age. You will never be younger than you are today, and a dollar/pound/Euro invested, is a dollar you don’t have to work for. You can have more, for investing less, but leveraging time.
  • Find a partner who has similar attitudes to money and wealth to yourself. The biggest causes of divorce in many countries is financial disagreements.

If you invest enough when you’re in your 20s, can you invest a minimal amount in your 30s and still become a millionaire?

Source: Quora

Let’s look at the maths. Imagine somebody gets a $100,000 lump sum, from an inheritance, at age 21.

They invest until 65 and get 8.5% per year – 1.5% a year below the average return of the S&P500.

They will have $3.6m in retirement, or about $1.6m in today’s money. All for investing young.

However, in the real world, people don’t usually have just one lump sum. Most people earn more money in their 30s and 40s compared to 20s.

Therefore, it is more practical, for most people at least, to start with small sums in their early 20s and then increase the investments as they age, and hopefully earn more.

What is more common is somebody who has invested so much by their mid-late 30s, or early 40s, that they don’t need to invest more to reach their objectives, whereas an older person needs to work very hard to catch up.

That is because if you start late, it isn’t easy to catch up, even if you invest hard:

We also have to remember something else – risk. Whilst it is possible to invest hard in your 20s, and it will likely work out, it is less risky to keep investing for decades.

That is because you are spreading out your investments. The stats do show that investing a lump sum beats dollar cost averaging (monthly investing) on about 65% of occasions.

Despite that, it is less risky to put in numerous lump sums and monthly injections, compared to just one or two payments.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 264.7 million answers views on Quora.com and a widely sold book on Amazon

Further Reading

In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:

  • Is it true that the only path to “real wealth” is entrepreneurship and running your own business? I suggest that in reality, you can become wealthy from a day job, even if entrepreneurship is the superior route if you want to become incredibly rich.
  • How do successful people really think? Are there certain mindsets and behaviours which set successful people apart?
  • What are four of the most essential elements of success? Even though breaking it down into just four components is difficult, I attempt to do so.
  • Does owning a business always add to your net worth, or can it sometimes subtract from it? Moreover, considering how difficult it is to value an illiquid asset like a business, should business owners be more diversified in their approach to wealth?
  • What are the biggest risks people should consider before investing? Most people assume that the biggest risks associated with investing are events like market crashes, but should we look more carefully at our own behaviours and actions?

To read more click on the link below.

Add a comment

*Please complete all fields correctly

Related Blogs