I often write on Quora.com, where I am the most viewed writer on financial matters, with over 317.9 million views in recent years.
In the answers below I focused on the following topics and issues:
- What are the biggest beginner mistakes in the stock market?
- Is cash trash, as Ray Dalio has suggested? Or is cash king?
- Should you invest for your kids, or let them be more independent? I look at what the evidence suggests.
- Is delaying gratification one of the tried-and-tested routes out of poverty?
- Is now a bad time to invest in the S&P500 index in the US?
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What are the biggest beginner mistakes in the stock market?
Whole books have been written about why we buy high and sell low.
Last year showed the extremes of human emotions. Fear in February, March, and April.
Then too much irrational exuberance in June onwards. Some people were even leveraging to the extreme.
Then fear again before the 2020 US election, when even a brief look at history would have shown that elections don’t affect stocks that much.
What is more, these decisions based on emotions can affect smart and well-informed people even more than the average new investor.
People who assume they are smart, and especially those who have recently got lucky in stocks, tend to only get more extreme with emotions.
In the 2000–2003 period, the people who were most likely to lose out made loads during the 1990 tech-fuelled market.
During the next downturn, whenever it happens, perhaps people who bought Tesla and only good picks will be most likely to suffer.
Apart from buying high and selling low, and trying to time the stock market rather than just putting in every month, other key mistakes are:
- Not being long-term enough to lower risks. It isn’t risky at all to invest in stocks for decades. It is if you invest for two or three years.
- Either being too diversified or overly diversified. Diversification can be great. It doesn’t mean you need to own every single asset class in the world!
- Focusing purely on illiquid assets like a property or business, and only putting a small amount in the markets. This makes it more difficult to overcome bad periods. Stocks are liquid if you have an emergency.
- Only focusing on investing goals. In reality, financial planning and your life goals often need to be aligned with the investments you pick. The person who wants to early retire at 40, need a different plan to somebody who desires to carry on working until 70.
- Over analyzing everything. This leads to analysis paralysis. 80% of investing is just showing up and getting the process started. I made loads of mistakes when I started. If you learn from them and pivot, that is what matters.
- Failing to reinvest dividends. Dividends, during some time periods, can contribute more to stock market returns than capital market appreciations.
Cash is King or Cash is trash? What is your view?
It depends on context. Some businesses do need cash on hand.
Most individuals need some cash for emergencies. Now cash flow, fresh cash coming in, is always a good thing.
The issue is sitting on cash thinking it is the safest option. It isn’t.
Dalio’s quote here sums it up:
The point he is making is simple. Cash has always lost relative to investing in productive investments long-term.
Cash has always had inflation and currency depreciation risks.
Nobody has ever lost money by holding the S&P500, or any other diversified ETF, for a lifetime.
Loads of people, literally hundreds of millions or even billions, have lost out after currency collapses or to inflation.
Yet something changed in 2008. Interest rates fell to 0% in many parts of the world.
Now in addition to those aforementioned risks, you are buying into a guaranteed risk.
That guaranteed loss is to inflation. 2%-3% every year really compounds.
Yet few people worry about losing 35% of their money over ten years in the bank.
Many people worry about losing 35% in one go, even though we know that markets always come back.
That is why inflation is a silent killer of wealth. It is stealthy and often takes its time to eat into your wealth.
Buffett sums up the reasons for this misunderstanding:
Some risk is inevitable. People who know what they are doing, or outsource the process, can dramatically reduce the risks.
Yet big risks in investing tend to come from not knowing what you are doing.
That includes various forms of speculation which should be avoided.
So, I don’t think cash is trash if people will put that money to work.
Most people also need an emergency fund if something goes wrong, like the laptop breaks.
Yet keeping most of our resources in cash is very risky. It just feels emotionally easier.
That is due to the lack of volatility which isn’t a good measure of risk.
What is the best savings plan for my child
It depends on where you live. Some countries, like the UK, have schemes such as Junior ISAs.
Junior ISAs allow parents to save and invest, tax-free, until the child is an adult.
This can be a great option for those that will stay in the same location forever.
These kinds of “onshore low-tax schemes” tend to not be as good for expats, who typically leave after a few years, and have contributions locked in.
Like with adult investing though, bank interest rates are low now, so investing makes more sense than saving.
Beyond that, however, I would make the following points:
1. There is a lot of evidence out there that if parents just give kids money after 18, that can have a bad effect on them.
Numerous studies have shown that kids who don’t expect to receive inheritance tend to invest more themselves.
It is for this reason that countless celebrities and wealthy people decide to give money to charity when they die.
Recently, James Bond actor Daniel Craig became the latest person to go down this route.
2. What can often work is incentives. If kids do chores, they can be offered money today, or more money (you match it) if they save and invest the cash they get.
People assume that kids aren’t interested in “serious topics” like business, politics, or personal finance.
Beyond a certain age, they often are and like having the responsibility.
Statistics also show that a lot of people just spend inheritances or acquired money anyway:
People are more likely to be sensible if they learn to associate money with hard work.
That 18-year-old “rich kid” who works part-time for $10 an hour, is less likely to want to spend $100 (10 hours of work) compared to the kid who got it handed to them.
Is delayed gratification the best way for poor people to get ahead?
Many people have heard of the marshmallow test. Kids who are able to delay eating one now, for more later on, do better in life.
Delayed gratification is absolutely one of the best ways to get out of poverty.
Too many people think “what’s the point in having loads of money at 40, 50 or 60. I will be old then. I won’t be able to enjoy the money!”.
What they forget is
- Time goes by quicker over time, so that time will soon be upon everybody
- Most studies show that older wealthier people are happier than younger wealthier people
- Most people are happier and healthier at an older age than they expected when they were younger
- Due to compounded returns, you can get higher total returns, for less risk, whilst investing less. In other words, investing small amounts of money from a young age can be more effective than going big at an older age. Many of the “everyday millionaires” in this world just started at 18, 20 or 22 and didn’t actually invest that much, but they leveraged time.
This book looks at some of the cognitive bias’ in this area:
However, I have noticed something. If people have came from poverty, or even an unstable background that isn’t poor, it is more difficult to delay gratification.
We even see this at a country level. People from more stable countries tend to save and invest more than those from poor, or unstable, countries.
Rationally, you would think the necessity to save and invest is higher if there could be disorder around the corner.
Yet a combination of stories about your grandma losing her pension to inflation, coupled with other traumas, can result in some people preferring to “live for today”.
One of my closest friends lived in India and he found that wealthier people were good at delaying gratification.
However, many poorer people would prefer one Rupee today rather than one tomorrow.
So, yes, delayed gratification is one of the keys, but it is also harder to put it into practice if you have came from an insecure background.
There is another issue. A wealthy son of a banker, or for that matter a son or daughter of an “everyday millionaire” from a normal background, will likely see the benefits of investing early.
Most people hold misconceptions about investing like it is always a risky thing to do.
Is now a bad time to invest in S&P 500 (April 2021) and when will it be a good time?
Now is never a bad time to invest in the S&P500 index provided you do three things:
- You are long-term
- You reinvest dividends
- You don’t panic when the market is down
Over any thirty-year period, the returns have been excellent.
Let’s give some examples
4.146% per year returns if dividends aren’t reinvested
9.727% per year if dividends were invested.
7.088% per year adjusted for inflation if dividends were invested
Now, most people assume that this must have been a bad time to start investing with this event and all…..
Here is now the market performed
3.146% per year returns if dividends aren’t reinvested
8.771% per year if dividends were invested.
6.832% per year adjusted for inflation if dividends were invested
6.167%% per year returns if dividends aren’t reinvested
10.250% per year if dividends were invested.
4.983% per year adjusted for inflation if dividends were invested
These results were despite a bad period from the mid-1960s until the early 1980s.
7.636% per year returns if dividends aren’t reinvested
9.883% per year if dividends were invested.
7.355% per year adjusted for inflation if dividends were invested
These results were despite a bad period in the 2000s, before around 2010.
You can play around on an online calculator like this one to show the point.
Now of course, as you get older, it is important to add extra diversification through bonds and other assets.
The point is, if you invest and forget for a lifetime, it won’t matter when you buy-in.
Look at the 1930–1960 time period. Wasn’t even the worst time period adjusted for inflation despite the awful which few years.
As nobody can know when the market will go down, it is better to just buy in and forget about it.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 317.9 million answers views on Quora.com and a widely sold book on Amazon
In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:
- How can you beat S&P 500 performance? Is it possible considering how efficient the index is? I look at various strategies people can use. More important, I ask another question – how can somebody beat the average person who invests in the S&P500?
- Why do many wealthy people diversify away from property, apart from aspects such as liquidity.
- Does being rich make people happier, or doesn’t it make much of a difference? I speak about some important studies which have been that, that have showed how money can at least help make us happier and less anxious.
To read more click on the link below