I often write on Quora.com, where I am the most viewed writer on financial matters, with over 248.9 million views in recent years.
In the answers below I focused on:
- What are the biggest mistakes made by newbie stock investors? I list some of the obvious, and not so obvious, ones.
- Why are so many “experts” always predicting stock market crashes and is it profitable to listen to their advice?
- How should a 66-year-old invest $1m, to ensure the money shouldn’t run out in retirement?
- What are some non-traditional investments that can pay off long-term? Even if they can pay off, should the average person invest in them?
- How has the concept of being an entrepreneurs changed over the years, now “everybody” calls themselves one on LinkedIn and beyond?
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I was watching an interesting video a few days ago which stated that up to 50% of Robinhood users now want advice.
It is probably because they got into frenzies like the GameStop situation, or speculated in many other ways.
It is a commonality I notice also after market crashes. Every time something like 2008 or 2020 happens, many people panic sell, and then decide they need advice due to failing to control their emotions.
Apart from that I would say
- Not getting started. 80% of success is just showing up as the saying goes. If you get started, and fail, like some of the Robinhood investors, then at least you can change things up and get advice. It is still better than never starting to begin with and staying in cash.
- Not buying and holding. “Trading” shouldn’t be the goal. Long-term buying and holding is much more profitable.
- Listening to the media for advice. With a few exceptions the media sensationalises everything. It is there to put bums on seats.
- Not reading about finance and investing. If you want to do it yourself, at least know what you are doing.
- Allowing friends and family, who in some cases have misconceptions about investing, to influence your decisions with untruths like “investing is risky”.
- Stock picking. The average investor doesn’t have the skills to do this compared to owning the market through ETFs. Now sure, you will win with some lucky bets, and have other periods of over-performance, but few will succeed long-term.
- Trying to time the right moment to enter markets (market timing)
- Speculating rather than investing
- Looking at valuations too regularly. This encourages many of the negative behaviours we see like panic selling.
- Being too diversified or not diversified enough.
- Failing to reinvest dividends and try to get “passive income” too quickly.
- Not leveraging time. Getting wealthy slowly by investing for decades is much more likely than getting rich quickly even from bigger investments.
- Getting overly excited and complacent if they have a good start.
- Not caring about what is familiar, which is one of the bias we have. Many people, young and old alike, prefer to invest in their home country’s stock market, or indeed the company they work for. Many others are more likely to buy Amazon’s stock if they live closer to the warehouse. This doesn’t make sense at all.
I guess we could also summarise and say a newbie needs to understand they are a newbie.
If they get that, they can do well, as they will be humble about their own knowledge.
A little bit of knowledge is dangerous but many people don’t understand that.
Spreading fear is more profitable than hope, and much more profitable than saying you don’t know:
It isn’t just relevant for investing either. It is relevant for many stories:
This is one of the best quotes on the media from the founder of Forbes magazine:
You see it all the time. People can live off one good prediction for decades.
Few people predicted 2008–2009. Those few who did got most of their other predictions wrong.
The same thing with the 2020 crash. Hardly anybody predicted it.
From those that did, almost everybody failed to see the fast recovery, which means that buying and holding was better.
Despite this those few who predicted it are still taking credit.
Studies which has been done on many of these media pundits has confirmed that you wouldn’t beat the market by listening to their advice. At least not long-term.
Investing and the wealth process can takes years or even decades, but that doesn’t sell so easily.
Ignoring the noise, not only from the media but also from friends, family and general society, is a skill in itself.
The conventional wisdom is often wrong. Look at the panic last year when most people seemed to think “this time is different”.
It depends on many factors including:
- How many incomes streams you have in addition to the $1m – for example rental property, a spouse’s income, cash etc
- How good your health is
- How much money you want to leave behind to children
- If you are still working and if not, when you will need to touch the money.
- If you have access to advice or not.
- What you want to achieve with the money. For many it is income. For others it is passing it on to the next generation.
Yet there are some rules of thumb. Bonds are boring and pay little these days, but they do offer retirees, or people close to retirement, some protection against market falls.
A 30, 40 or even 50 year old doesn’t need to worry about markets falling, but most 66 year olds do if they are 100% in stocks.
Given all of those fundamentals it makes sense to invest 40% in bonds, and 60% in stocks.
The most sensible way of doing this is
- 40% in local bonds. So US government bonds if you are American or Eurobonds if you live in the Eurozone
- 30% in the local market. So, FTSE All Stars for a UK Investor or the S&P500 if you are an American.
- 30% in international markets
Reinvest dividends and rebalance on a yearly basis or whenever there is significant movement in prices.
If you do that, and withdraw no more than 4% per year ($40,000), you should be fine.
I would avoid all forms of speculation and high-risk assets, especially if you don’t have access to advisors who can assess this risk.
Stick to a tried and tested, vanilla, strategy and you will do fine, provided you don’t panic during market crashes.
That is the safest withdrawing “rule of thumb”, even though 5% would probably be OK.
It depends what you mean by non-traditional. If you mean non-traditional for the average investor I have seen many.
Most of them are high-net-worth assets.
- Private equity investments and funds.
- Angle investing. This is typically at an earlier stage of the process than private equity and much sooner than when a firm IPOs on the stock market.
- Loan notes. A type of private placement.
- High yielding corporate bonds.
- Some forms of REITS even though most REITS are vanilla.
- Structured assets such as structured notes.
- Niche funds and ETFs, even though they are more typical than some of the other assets listed above.
- Emerging market property. Buying in very frontier markets has worked for some investors.
Yet comparing the returns in angle, or private equity investing, to the stock market is like comparing apples and pears.
One is very safe if you keep it long-term, and if you invest in the whole market through ETFs.
Another one is highly risky. So risky that you usually need to be a certified high-net-worth investor to qualify.
Even then, most successful angle investors will see many of the investments go down to zero.
The hope is that if 100 of such investments are made, two or three will be big winners.
As part of a diversified portfolio, they can work for wealthier people, but there are plenty of risks there as well.
The vast majority of people shouldn’t go into some of the aforementioned assets, if they aren’t high-net-worth and/or don’t have access to advisors.
These are the kinds of things to do to diversify once you are already wealthy, or if you have somebody who can probably look at the risk for you.
The next few years will be interesting though, as many of these assets classes are now available to the non-high-net-worth.
We have also seen the rise of peer-to-peer lending platforms. I suspect there will be some people who will get their fingers burned, as they didn’t probably understand the risk going in.
One of the main differences I have noticed is more people are calling themselves one.
In general, I have found that people who call themselves “a business owner” are more like to be entrepreneurs compared to those who claim to be one.
This quotes sums it up
I am not saying people are lying if they claim to be an entrepreneur.
However, it is harder to define than an owner, and with the rise of self-employment, anybody can make half of a claim to it.
One big reason why more people want to call themselves entrepreneurs as opposed to owners is the way the world has changed.
In the 1980s, 1990s and maybe even early 20002, wanting to run your own thing wasn’t seen as that sexy.
The best and the brightest wanted to be employed at big firms. Many people would want a job for life at companies like IBM.
Some people even considered those who started their own businesses as losers unless they actually made it big.
Now everybody seems the glamorous side of running your own ship.
Few sees the hassles, challenges and drawbacks. Don’t get me wrong, running your own successful business is much better than most jobs.
Once you do it, you won’t want to work for anybody again if you can help it.
But the point I am making is the concept of entrepreneurs has now changed full circle, 360 degrees.
Therefore, some people claim to be entrepreneurs on LinkedIn after one day in the “job”.
Linked to that is the idea that all successful people need to be innovative.
Being innovative does help but at least 70% of the successful business owners I know have just got a job, got good at it and then started their own business.
For example a doctor who starts their own private clinic, or a recruiter who starts their own company, often leveraging existing knowledge and contact.
Most haven’t invented something or reinvented the wheel per see, nor have most received millions in venture capital money.
The media loves to speak about the outlier success stories, which is one reason why the focus is often on those kinds of companies.
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Adam is an internationally recognised author on financial matters, with over 248.9 million answers views on Quora.com and a widely sold book on Amazon
In the answer below , taken from my online Quora.com answers, I spoke about the following issues and topics:
- Will the younger generations be more financially successful than baby boomers? People assume the answer is no, but is that really the case if we look globally and factor in future inheritance expectations?
- What advice would I give to younger people joining the workforce? I speak about two or three techniques that few people use.
- How can people not waste their youth?
- Why is America doing well economically, but has done terribly in terms of the pandemic?
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