What are the best inverse ETFs in 2021?

I often write answers on Quora, where I am the most viewed writer for investing and personal finance, with over 220 million views. 

On this article, I will use my answers from Quora to answer the following questions:

  • What are inverse ETFs in 2021? What are the best inverse ETFs in 2021 or beyond? I explain below why the answer is……none of them!
  • If you invest $1,000 a month into the stock market every month, how long until you can become a millionaire? You might be shocked by the answer to this one, and the maths behind it!
  • Are technology stocks more volatile than normal stocks? Is this volatility a problem if you are a long-term investor? Also, should we make a clear distinction between individual technology stocks and the Nasdaq as an index, which is tech-focused?

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.

Is there an ETF whose value increases if the corresponding index falls?

There are ETFs, and other financial instruments, which are inversely correlated with indexes, including inverse ETFs.

There are various ways to short indexes. Yet this is unlikely to be a winning strategy because:

  1. If you buy such instruments, you don’t get the dividends the index gives you. Dividends make up a lot of the total returns of an index. Historically, dividend reinvestment have given an index more than 30% of their return. Dividends also protect you when an index falls. The Japanese Nikkei is famously the only major index which is down over a 30–35-year period……yet somebody who reinvested dividends would now be slightly higher even if they invested right at the top.

2. Markets tend to go up long-term. Even those exceptions to the rule tend to once dividends are reinvested as mentioned on the last point. So trying to short an index is unlikely to work long-term.

3. if you buy 2–3 indexes to include a bond index, you can rebalance when a market is falling anyway

4. Most importantly market timing doesn’t work…..at least long-term. Now sure, plenty of people get lucky once in a while. I do personally know people who had cash lying around in 2008–2009 or 2020. Yet long-term it just doesn’t work as a strategy and there is a tone of academic, peer-reviewed, evidence to back that up.

5. There are many lower-risk ways to gradually get rich investing as opposed to quicker routes through speculation.

6. 2008 and 2020 should be warnings. 90% of people, if not 99% of people, didn’t see it coming – the market falls I mean. From those that did, almost all got the next thing wrong. Most thought it would take markets years to recover. I don’t know even one person, in my personal network or online, who predicted that markets would fall 50% quickly and then recover speedily. At best, I know people that got one prediction right.

7. What are inverse ETFs? They are constructed by using various derivatives to profit from a decline in the market. They are very complicated and risky.

Shorting an index based on leverage is even more risky as well, even though not all shorting is highly leveraged, and not all ETFs which are negatively correlated to the index are leveraged.

Are technology stocks more volatile than other industries? 

Yes that has historically been the case. Look at a graph of the Nasdaq, which isn’t completely technology focused but is tilted that way, compared to the S&P500 or Dow Jones

The highs are higher on the Nasdaq and the lows are lower. For example:

  • It took the S&P500 and Dow Jones 11–12 years to hit its 2000 peak after the .com and 2008 crashes, even though it did also hit it just before 2008. In comparison , it took the Nasdaq 14–16 years to recover
  • The Nasdaq fell much stronger in 2000 and 2008.
  • Yet the Nasdaq’s performance in the 1990s and indeed after 2008 has been much superior to the Dow, S&P500 or MSCI World for that matter. The total performance, adjusted for the good and bad times, has been better over the last 30–40 years.
  • Technology stocks and the general market are correlated, but there can be big differences. Last year was such an example. The Nasdaq was up 43%. The US Markets in general rose by about 17% for the year. Both fell during the crash. Unlike 2000, the Nasdaq just recovered more quickly. Also unlike 2000 and 2008, the Nasdaq didn’t fall more aggressively this time, as more people were working from home due to the pandemics and lockdowns.
  • Individual technology, especially start ups where people are speculating on the idea rather than looking at the fundamentals, can be even more volatile than other start ups.
  • It depends what you compare technology too. The airlines have had periods of volatility after 9/11, then they came back, and then got hammered in 2020. Some consumer stable companies like Coca Cola are less volatile, but some volatility exists of course.
  • Even though the biggest technology firms and e-commerce related firms get bigger over time, it is very difficult to know who the winners will be. The Nasdaq has more than recovered from the crash of 2000, and people are using technology more over time. Yet people often forget that countless individual names went out of business. Others, like Ebay, have became smaller over time. The stock price hasn’t fallen but it hasn’t kept up with competitors. Many of the new winners, like Netflix, didn’t exist on the stock market even ten years ago. Some of the winners in 2030 might not have been founded yet. Big tech companies are ripe for competition and more regulation.

Volatility isn’t a problem if you are a buy and hold investor who doesn’t need the money for years.

It becomes a problem if you either need the money soon or you are likely to panic sell during the lows.

In which case, having a less volatile portfolio makes sense.

How long will it take me to become a millionaire if I invest $1,000 a month into the stock market?

I will give you some maths/statistics later on which will shock most people…..even some people who have read a lot about investing.

Before doing that, it has to be mentioned that the answer depends on the following variables:

  • How the stock markets perform? You can’t control this one and nobody can predict this for sure.
  • More specifically, which years market perform after you get started. More on that below.
  • If you are looking at $1million in nominal terms or real terms after inflation.

Let’s take the S&P500 as an example. It has given investors about 11.1% since 1950, adjusted for dividend reinvestment.

That is over 7% per year adjusted for inflation.

Yet some periods, like the 1990s and 2010-present, are better than that, and some are much worse.

There have been some decades where it has given 0%. Other decades where it has done as much as 16%-18% adduced for dividend reinvestment.

Let’s imagine the S&p500 did exactly 11.1% every year.

It won’t happen but just let’s do this as an exercise.

It would take you about 21.5 years in that case to become a millionaire in nominal terms, 27 years to reach 2 million, 31 years to reach 3 million.

It will take you 40 years to reach 8 million and about 42.5 years to reach $10 million.

The speed in which you would accumulate wealth at the later years would accelerate due to compounding.

Of course, if inflation is running at 2% per year, it will take you longer to reach those thresholds.

However, as mentioned, that won’t happen.

So let’s look at two different example scenarios to illustrate a point:

Example scenario 1.

You invest $1,000 a month consistently with no lump sum injections.

Years 1–5 you get 0% per year.

Years 6–10 you get 2% per year

Years 11–20 you get 17.7% adjusted for dividends reinvested.

In this case you have reached millionaire status in 20 years. 1.5 years quicker than the constant 11.1% example given above.

Example scenario 2

You invest $1,000 a month consistently with no lump sum injections.

Years 1–10 you get 17.7% adjusted for dividends reinvested.

From year 11 onwards you get 2% per year

Do you know how many years it will take you to become a millionaire in this situation……37–38 years.

Yes 37–38 years.Almost a decade longer than in example scenario one.

If you don’t believe check out this calculator – Compound Interest Calculator

Here is example scenario one:

As you can see $990,000 is achieved after 20 years, which means $1m will be under the same scenario in just over 20 years.

Here is example scenario two:

As you can see $990,000 is achieved after 36 years, so $1m should be in the 37th year.

The reason is simple. In scenario two, the highest returns came in the early years when the account was worth less.

The lower returns came when the account was worth more. In comparison, in scenario one, the poor returns were at the beginner, when the account wasn’t worth much in any case.

And yet everybody seems to panic when markets are stagnant or falling……they worry about investing during a time like 2000 until 2010 which was “a lost decade”.

It wasn’t a lost decade for those who kept buying at lower prices.

Now again, we can’t precept which years will be better or worse for markets, but don’t be afraid if there is a bad period.

As an aside, investing a relatively small lump sum at the beginning will bring forward the date by a few years or longer – again due to compounding.

Further Reading

My answers on Quora.com have received over 219 million answer views in the last few years, making me one of the most popular writers on that social media platform. 

In the answers below I focused on:

  1. Why do people fail to realise the need to invest for retirement at a young age, even though most people know, deep down, that they should set something up?  Is it just human nature to procrastinate and delay?
  2. Who tends to be more motivated? Rich, middle or lower income people or is the answer more complex than that?
  3. Do stocks move the index or do indexes move the stocks? Or is it more complicated than that?
  4. Do you need to get a degree to become a millionaire in 2021?

Here is a preview of one of the answers:

Most people spend two, three or even five times as much time planning their holiday/vacation compared to investing:

There are many reasons for this.

The biggest are:

  1. People have been taught to assume that life gets worse when you get older. The book below tells the story about how most surveys from younger people assume that life gets worse as we age. What’s the point, therefore, of having all that money, if you will be old, fail etc? Some teenagers and people in their early 20s even think that people in their mid 30s are past it! Many people in their 30s assume those above 60 will lack in energy. Whilst it is true that we are more likely to get healthy problems as we age, times have changed. It is pretty normal now for people to feel healthy in their 60s, 70s, and even above 80. I personally know plenty of older people with more energy than the average 20 year old.

2. Most people find investing boring or complicated, often because of the media, schooling and other reasons. It is a bit like setting up a will. Most people know it is a necessary evil, but few do it quickly.

3. Sometimes people have been let down by big institutions like the banks and then they are “once bitten twice shy”. This was especially the case in the 1980s and 1990s when the services on offer tended to be poor.

4. Some people assume that you need to be rich to start investing, and investing small amounts is pointless, despite the reality of compounded interest rates .

5. Bad spending habits. As time has gone on, marketing from bigger companies has became bigger, and is often linked to fear of missing out on “stuff”.

6. Some people really can’t afford to invest unlike those who fall into category five.

7. A certain percentage of people want to put all their eggs into the basket of their own company or working till……

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