In this blog I will list some of my top Quora answers for the last few days.
If you want me to answer any questions on Quora or Youtube, don’t hesitate to email me – firstname.lastname@example.org
Table of Contents
What are the fastest ways to increase your net worth through lifestyle choices?
It depends on what stage you are at in your life. Firstly, if you are at the beginner stage of your wealth journey, there is no fast way to automatically increase your net worth.
That is unless you get married into wealth, inherit it or win the lottery.
Now sure, there are many ways you can increase your chances of net worth if you are at this stage.
What are those ways? The biggest ways are:
- Take calculated risks. For example, instead of selling your time for money, sell your time based on performance. For example, if you are earning the minimum wage at 22 and have a small amount of savings behind you, why not become a real estate agent or something else which is based on commission or a low basic and commission?
- Play the numbers game. If you do focus on results as opposed to selling your time for money, it could take years or even 1 decade to start earning big. Not always though.
But now let’s say you are more established.
What are the options now? Well they are much more wide. Some examples:
- You are earning 200k but live in a place which taxes you 50% and the cost of living is high. You move your residency to a low cost of living and tax place. This can make a huge difference. If you live in a country with 10% taxes, which is cheap or relatively cheap, you could invest the lions share of your earnings as a private business owner. That is one reason why remote working got so big before the crisis, and many countries are trying to attract nomads who are earning a reasonable amount, with “nomad visas”. I read a story that Barbados has became the latest country to offer nomads a tax-free route for a few years if they pay the visa costs:
2. Focus on the 80/20 rule. If you are in business, 80% of your revenue will come from 20% of your clients. 20% of your paid ads will generate 80% of the profits. 20% of your clients will cause 80% of the headaches. And so on. So if you learn how to leverage time, technology and money, you can increase your net worth.
Remember though, overnight successes are often 10 years in the making!
So those people that look like they got rich quickly, often failed a lot before the quick turnaround!
What is your review of Marcus by Goldman Sachs?
There are positives and negatives. The biggest negative of all is simple.
Long-term, you can’t beat inflation with a bank account these days.
The Marcus by Goldman Sachs UK product pays just 0.70% per year.
Now maybe for 1–2 years inflation might be so low that 0.70% is below due to the economic downturn.
However, last year inflation in the UK was running at 2%-3%. That means you were guaranteed to lose 1%-2% to inflation!
Cash is not 0% risk. It not only has inflation risk, but it also has significant currency risk.
Going back to the UK example, imagine you were a non-British person, or UK expat, who put 100,000GBP in a bank account in 2007–2008.
At the time that would have been worth $200,000, with a 2:1 exchange rate against the USD.
The Pound is now trading at around 1.30 against the USD, and has also weakened against the Euro.
In addition to losing against inflation for 13 years, that represents a 40%-70% loss to inflation + currency loses.
100,000 pounds now is only worth $132,000. At 1%-2% interest rates for 13 years, the gap is too big to close.
The same money put in the US stock markets would have more doubled despite the 2008 and 2020 falls.
Long-term, cash has never beaten markets:
There are positives associated with the solution though. The biggest positive is that it is a safe and convenient place to put emergency cash.
In other words, if you aren’t using the accounts as a place to put large amounts of money (investing), and instead you are using it for emergency cash which can be withdrawn in hours/days if something unexpected happens.
It does make sense for everybody to have a minimal amount of cash on hand in case of emergencies.
But 2008 changed everything. Before that point in time, you could at least beat inflation in the bank, if you were terrified of market volatility, even though nobody should be afraid of it because markets have always hit record highs long-term.
Historically, money in the bank has paid inflation +1% or even 2–3%.
Now savings accounts have paid below inflation, in most developed countries, for 12 years.
With the covid situation it seems that rates will remain low for at least another 5 years.
Rates may never go back to 5%-6% anytime in our lifetimes, even though you never know!
Is investing in the stock market for the next 40 years a good idea? Or are we entering a dark age investing-wise?
We can never predict the future with certainty. What we can know are these facts:
- Nobody has ever lost money by investing for 40 years in US and most major stock markets!
- Even the worst performing developed stock market (Japan) isn’t down on 40 years ago, especially if somebody has reinvested the dividends.
- Even somebody who was unlucky enough to invest in that outlier case (Japan) right at the top, would have been fine if they monthly invested for the next 30 years, because the Japanese Market has recovered half of its fall. In other words, the Japanese market briefly hit 36,000–38,000. It fell to 7,000. It is now at 22,000–24,000. However, if you factor in dividends you would have made more. Moreover, the market was trading at 7,000–14,000 for over a decade. So a monthly investor would have made a reasonable amount.
- During times when one market struggles, other assets perform better. So getting back to that outlier again, if a Japanese investor would have been 40% in Japanese equities, 30% in US or global equities and 30% in bonds, they would have done quite well in the last 35 years.
- When stocks fall, short-term government bonds tend to rise.
- When a market looks weak on paper, sometimes it isn’t quite as bad as people think. Take the UK Stock Market, the FTSE 100. It has done worst than the FTSE250 and much worse than the S&P500. It looks like it has been stagnant for two decades, but it’s dividend yield changes everything:
7. When one market has a bad period, it eventually improves. Take Japan again. One thing that most people don’t know is that since 2009, it has been one of the best performing stock markets. It has beaten most European ones in that time period after decades in the “darkness”
8. If a stock market does badly for 10 years (like the S&P500 from 2000–2010) that is a great buying opportunity. So stagnating and falling markets are a great opportunity.
9. Nobody can time markets
10. Innovation isn’t standing still. Look at some of the new technologies coming out now:
So given those 10 facts, you would have to be incredibly unlucky not to “win” if you follow the “formula” below:
- Invest monthly for 40 years, or at least at regular intervals when you can afford to do so
- Don’t invest in just one market. Invest in 2–3 + a bond market index
- Rebalance when one component is doing better than the other
- Reinvest dividends
- Don’t lose hope during the weak periods for markets
That bass formula has never failed an investor in the last 200+ years of stock and bond markets being around.
People get into trouble when they go into nieces, like putting 100% of their assets in the Chinese or Japanese markets alone, without holding a bond or international index.
If you hold everything (all the world’s stock and bond markets) forever, you stand a great chance.
Is frugal living and investing early better than having a pile of cash and investing later?
Usually, but it depends on how you define “a pile of cash”.
Of course, if somebody inherits $100m at age 56, even a very successful get rich slow investor will probably not beat them!
Your basic point is right though. Compounding, and time, are two of the only free lunches available in investing.
You can have more, for investing, less, by leveraging time. You also reduce your risks by being long-term.
Let’s look at a simple example.
Let’s say David invests from 18. He starts with just $1,000 a year until 22.
Then from 22 until 25, he invests just $2,500 a year. From 25, he gets a much better job, and invests $5,000 a year until age 45.
At age 45, he doesn’t invest one more penny, USD or Euro. He just leaves the money sitting there.
He gets 9% per year with dividends reinvested, which is about 1% less than many major stock markets have historically given.
At age 65 he would have about $2.3m. At 70, about 3.6m! And that is from investing small amounts from 18 until 45 and $0 from 45.
In comparison, if Pete invests $5,000 a month from 55 until 65, even if he gets 12% because markets are doing well, he will only have 1.1m-1.2m at retirement.
However, he has also invested far money more over time – $600,000 – whereas David invested just $4,000 from 18–22, $7,500 from 22–25 and $120,000 from 25–45.
From then on, he left the money sitting there for another 20–25 years.
So by investing just $131,500 early on, he has a bigger investment account than Pete.
Of course we can’t know the future, but historically it has always paid to invest early.
It also means people can have a balance by investing relatively small amounts over a long period of time.
The problem is, many people still assume that you need to be rich to start investing, which just isn’t the case.
One final point I would say though is that many people don’t understand compound interest.
They have read quotes like the one below and think it is amazing:
It is amazing, however, you won’t be able to get a “stable” return.
In reality some decades will be just higher than 10% per annum average returns (the 1990s and 2009–2019 as two examples) and some will be stagnation or worst (2000–2010 as an example).
It is important to not lose heart during those stagnant times, as you are buying markets at cheaper prices.
Should millionaires be considered poor?
In 99% of occasions, of course that isn’t the case. However, there are a small number of occasions where millionaires “feel” poor or at least are relatively poor.
Being a millionaire means having $1m, pounds or Euros in assets.
So it is possible to be worth $1m or Pounds, and have a low income.
It is also possible to be earning $500,000 a year and spend $500,000 a year.
So if you are an old age pensioner, living in New York, London or another expensive city, you might be living hand to mouth if you are living in a million dollar or Pound house on a modest pension.
Some young professionals do the same thing. It is now called “house poor”.
People who live in big fancy homes, sometimes on mortgage and sometimes paid off, who can’t live well due to their lavish house:
Some widows who are millionaires on paper, have even needed to sell (downsize) their home in retirement, because their pensions couldn’t support the maintenance and tax associated with such a house.
If somebody is earning 1million + and they are broke, they are a fool.
If somebody is worth 1million + and are broke, they might not be a fool.
It depends on the circumstances.
What is a middle-class millionaire?
Typically, somebody that has never been a high earner, who has gotten wealthy slowly.
For example, a manager, accountant, teacher, some doctors and dentists etc.
These are known as “everyday millionaires”. Two of the best books on this subject are:
This book is older but also a classic:
What a lot of people don’t realise is this is the norm. By the norm, I don’t mean that most middle-class people become millionaires.
By the norm I mean that most millionaires aren’t high income. Some examples include:
- 14% of the world’s millionaires are said to be teachers
- There are more millionaire managers in many developed countries than executives
- 60% of former basketball and footballers are estimated to go broke within 5 years of retirement.
I personally know a bunch of middle-income, middle-aged millionaires. I also know a bunch of highly paid broke people!
Of course, one of the reason for these statistics is that there are more managers and teachers than celebrities or executives.
Nevertheless, wealth and income aren’t always as well connected as people assume.
They can be, but it depends on the choices and decisions people make.
Things like divorce, over-spending and substance abuse can destroy even a high earners chance of building wealth!
Is it ever too early to start planning for retirement?
Not in this day and age. Previously, people would just invest in structures where you couldn’t get the money until you are 60 or 65.
Examples include government and private pensions linked to your company.
So, in that system, you could build up wealth, but not live off it until older age.
In the world we live in today, you can invest in much more flexible structures.
There are also more trends happening now including
- It is easier to travel and live/retire overseas than in the past. Obviously, coronavirus has put a brief halt to that process, but the long-term trend isn’t going to change. In fact, even during the middle of the pandemic, many governments bought out new “nomad visas” to encourage people like the young retirees to relocate to their country. The reason this is important is the figures for early retirement can add up more easily in a cheaper country.
- Bigger inheritances for more younger people.
- It is now easier to invest smaller amounts of money early and then increase once you are earning more, whereas previously investing was more elitist
- More extremes. Previously, people would earn more as they got older. That would then change come 55 or 60, when many people would slow down. That trend still exists but these days there are more younger people who are at the extremes come 30. You have a situation where 1/3 of the world’s self-made millionaires are estimated to be in their 20s and 30s, due to trends like technology, and others who are broke. With the online world getting bigger, this trend might get bigger. Look at what has happened in the last 20 years. Which industries have gotten bigger and bigger? Technology, sports and entertainment, travel, finance up to a point. Those industries have created a lot of high-income younger people in Silicon Valley, London and online.
- Less secure jobs. So even people doing well, who love their jobs and businesses, are planning for the worst. So there has been an increase in the number of people planning for early retirement, even if they don’t want to take that option.
So the answer is, planning now is always better, even if these five trends don’t apply to you.
It has always been the case that starting small, at a younger age, is better than starting big at an older age, due to compounding.
The difference now is the flexibility that is on offer in terms of where to retire, how to retire and those retirement solutions themselves.
Retiring at 65 in your home country on a final salary pension might still be an option for some.
Increasingly though, people are looking for less conventional ways to retire.
If the US stock market had no history to relate to, would you still invest today?
Many people might have heard the news that Hong Kong has a new tech index:
Some people rushed to get a piece of the action. They were convinced that the trade dispute between the US and China would lead to more Mainland Chinese firms delisting from US indexes and going onto this new “tech index”.
Others have been cautious, realising that new markets don’t always succeed.
Nobody knows which camp will be proved right. What I do know is a new index has more risks.
To answer your question directly then, of course it wouldn’t be useful to invest a lot in US Stock Markets if there was no history!
The reason is simple. History isn’t an absolute guide to the future.
However, if a market has been up consistently over 100 + years (the Dow) and over 200 years (the predecessor to the Dow), there are reasons why those markets have been up.
And the reasons aren’t because the US is the biggest economy in the world.
If that was the case, British markets would have outperformed in the 19th century, and Chinese markets would have done well throughout the 2000s.
The fact is, US Market have several things going for them, including:
- True international diversification. Many non-US firms IPO in the US, and most big tech and other firms have tones of revenue coming internationally. Take Apple as an example. Less than 45% of its revenues comes from the Americas including Canada and the US:
2. Strong rule of law, one of the longest democracies in the world.
3. A lot of institutional investors. In the 1950s, most of the investors were individuals. Some emerging markets are the same now. These days, there are more banks and other institutional investors in the market. That means the market is less prone to irrational moves than in the past. It is still prone to them as we saw in March, but less so than in markets dominated by smaller individual investors.
4. The ability to come back from setbacks. The US Markets have done well throughout wars (internal and external), recessions, depressions and various setbacks. In comparison, some countries have been “hot” for a time, but then they have let that setback affect them forever.
5. The US Markets have typically not been down over a 20 year period, especially if held with bonds:
So one of the biggest reasons people invest in US, and some other developed markets, is they know two things:
- Nobody can time markets
- There is a very good chance that markets will always recover from falls.
That is why the UK Markets are also still interesting for some people as well. People know that they will be around in 30 years.
Whereas with some emerging markets, and new indexes in developed makers, the risks are always higher.
You also don’t always get a dividend for that risk. Developed country equities have beaten emerging markets, on average, in the last 30 years.
So you often take on more risk, for no extra gain!