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 contact me.
One of the biggest one is that risk and return are always connected. They aren’t in all circumstances.
Let me give some examples.
Most people agree that emerging markets are more risky than US and developed markets in investing.
Sometimes they have outperformed, but long-term they haven’t beaten developed markets.
The only time they do is if people cherry pick the data, like the graph below which starts at a time when emerging markets did well.
If we extend the graph until 2020, or focus on 2000–2020, we will find that US Markets have beaten emerging markets.
Another example is cash vs bonds vs stocks. Cash is almost zero volatility.
It is volatile up to a point as interest rates do change. They fell in 2008 and again in 2020.
However, people know what they will get. The same is true of government bonds up to a point, even though there is more volatility.
Stock markets, in comparison, can go up or down by 40%+ in extreme years.
So that means stocks are more risky, because they are more volatile?
Of course not. Volatility is not risk. Held over any long period of time, stocks are safer than holding cash which can lose to inflation, provided somebody holds the entire market rather than individual stocks:
There is a difference between volatility and risk, in the same way there is a huge difference between statistics and risk.
We saw this issue during the whole masks debate. Many people said “what’s the point in masks”.
Even the WHO said that. However, those that study risk, like Nassim Taleb, made an astute point.
Namely, even if our own risk is only reduced by 1% by wearing masks, that can make a huge difference (up to 90%) due to compound probability.
So now many people in the WHO are coming around to that idea, due to seeing “mask wearing countries” doing exceptionally well.
They were just studying statistics and not looking at risks, including compounded risks.
The same is true in investing. Many people don’t understand risk very well, so they assume that cash or even bonds are automatically.
However, the risks compound. if you hold a lot of cash for 1 year, your risks are minimum.
If you hold it for 20–30 years, you are dramatically increasing your risks of seeing a currency crisis or losing big time to inflation.
Getting 0% on your money for 1 year, when inflation is at 2%, is “only” a 2% lose to inflation.
Over 10 years you could see 30% of your capital taken away due to inflation. Yet few consider this risk.
A final comment would be the idea that renting is always dead money and buying is always a good investment.
That is an answer for another question though!
Here are 20 things that are important
- Live below your means and invest the surplus well
- Don’t confuse volatility and risk.
- Be diversified but not overly so
- Avoid most types of debt like consumer debt.
- Focus on your income, spending and investment habits and not just one of them.
- Don’t watch the news every time markets are going up or down
- Don’t try to time markets. The best time to invest is always today.
- Don’t stock pick if you are an average DIY investor
- Focus on tax-efficiency as well. Your net worth is your net income – expenditure x compounded investment returns.
- Don’t forget that all our decisions compound over time, so the small details can make a big difference.
- Read a lot. As per the quote below, it also compounds:
12. Focus on execution and not ideas. Reading and learning is the first step. The most important step is consistently executing
13. Make sure you can control your emotions. This will help during market ups, downs and crashes.
14. Always be prepared to adapt in business
15. Take calculated risks. Taking no risks at all stores up hidden risks long-term. It is best to take risks when you are in your 20s , when you have little to lose.
16. Surround yourself with better people and get rid of toxic ones
17. Look after your health as well as your wealth. There is no point in getting wealthy if you get sick at 30!
18. Be very selective about how to use your time
19. Focus on productivity rules like 80/20, 64/4 and 50/1. Invest in technology if you are a business owner to make this easier.
20. Be prepared to keep your pride away from decisions as much as possible. Many people are willing to “cut your nose to spite face”
There are many others I could also say, such as the important of leverage.
Leveraging time (compound returns and playing the long game in business), other people, money etc.
It is simpler than people think, but many people assume it is a get rich quick scheme.
Or other people focus on the opposite, and incorrect assumption; namely that stock markets are risky and dangerous!
Assuming you don’t have a big inheritance or a lot of money to begin with, the only way to get rich investing without speculating is:
- To be long-term. Keep investing for decades
- Reinvest all dividends
- Never panic when markets are down
- Increase how much you invest as you age if your salary/income goes up.
- Put in any unexpected or one time cash injections from inheritances.
- Never lose faith during periods where makers are down or stagnant, even if it carries on for 10+ years, like it did from 2000–2010. This just means that you are buying at cheaper prices.
Let me gives you some examples of how this can all add up to a million or multi-million portfolio.
- Let’s say somebody invests $200 a month x50 years, from age 16–18 when they have a part-time job, though to 68, when they retire. They get 8% on average, which is 1%-2% less than the average performance of the Dow or S&P500. They would have a $1.4m portfolio in retirement.
- Now let’s say somebody invests the same (200 a month for 50 years) but they add a $100,000 inheritance they received in their 20s. The total pot at retirement? $6.1m! yes $6.1m. From simply adding $100,000 from an inheritance, the total pot has increased by over $4.5m!
- Now let’s say somebody does an average of $500 a month for 50 years but adds $100,000 from a bonus or inheritance in their 20s. The total pot? $8.4m.
The point is 6.5%-6.7% above inflation (the average US Stock Market performance – more for the Nasdaq by the way) doesn’t sound like a lot.
But over a long period of time, it makes a huge difference. Often you hear stories about an old granny who is worth millions.
Often all they have done is held stocks “forever”. This lady was just a secretary.
She left $8m when she died! – Thrifty Brooklyn secretary leaves US$8m for needy students
She isn’t a on-off either. I personally know several millionaires who are middle-aged, in some cases never had a high-income or got much inheritance.
All they did is start young and they invested “forever”. They never panic sold during crashes, and were just patient.
Of course, there are more aggressive wealth accumulation strategies that can help people become wealthy in their 20s and 30s.
There are many ways to skim a cat though, and the above strategy is tried and tested.
It doesn’t mean it is guaranteed. It merely offers a good probability of a sound risk-adjusted return.
Something which is portable, long-term, and not based on speculation.
For most expats you need a portable, third-country solution (so not based in the UAE or your home country).
If you do that long-term with some good, low-cost assets, like ETFs, you are onto a winner.
I explained in more detail in this answer – Adam Fayed’s answer to How do you invest as an expat if you do not know where you will eventually settle?
I would certainly avoid:
- Most digital currencies
- Stock picking individual stocks based on emotion
- Binary options
- The flavour of the month (gold in 2010 and 2010), Bitcoin in 2018 etc.
- Options and futures.
And the list could go on and on. If you aren’t a professional investor, you should avoid most of these assets.
The point is that sensible, long-term, investing is very different to speculating.
I would also avoid property in most situations. Don’t get me wrong, it now looks much cheaper.
Prices have fallen to 2010 levels and I am sure there are some great bargains out there.
However, there are some structural issues in Dubai, such as oversupply, which means it isn’t usually a good long-term investment.
Too much was built, too quickly, and that has affected the market:
As an aside, I would be very careful with do it yourself (DIY) investing unless you know, for sure, that you can control your emotions.
Studies have been released from Schwab and other DIY brokers, which showed that 35% of people panic sold during the crash in March.
That is similar to how people reacted in 2000 and 2008. Everybody says they won’t be the person to do that, but many people end up doing it anyway.
The key things about assets like index funds and ETFs is you hold them long-term.
Ideally long-term should be “forever”.
Firstly, we can only control certain things. It is pointless to worry about things outside of our control.
That includes things like
- If there will be a second lockdown
- Who will be elected in the US or other countries
- How the stock market will perform
What we can control is our own thoughts and actions. This crisis has been a great example of that.
I remember in March there were two kinds of people in many industries; those who pressed the panic button and people who saw an opportunity.
People who pressed the panic button were reactive. Those that saw an opportunity were proactive.
Examples of proactive behaviours included:
- Increasing marketing budgets as the prices for Facebook, Google and other ads went down. As more people were at home during lockdowns, it was a great time to do something like that
- Focus on webinars and not seminars
- Buying stock markets at cheaper prices and not having a “wait and see approach”
- Doing more and more things online. That meant adjusting if you were used to face-to-face in business
I don’t know what industry you are in, what skills you have, and what capital you have available to you.
All I do know is that there are always opportunities and threats. There always have been, and there always will be.
I am sure those people who saw the Nazis going through Europe in 1941, and people who saw the Berlin Wall fall, thought they were living in unprecedented times too.
Yet long-term, humanity finds a way through these issues, and does eventually become wealthier.
The key things to understand about this economic crisis are
- Stocks may no longer be cheap, unlike in March-May, apart from a few markets like the UK FTSE. However, with interest rates at 0%, loads of QE and bond rates so low, many investors understand that there isn’t much alternative apart from markets to get a yield for money. I am not saying that markets will have another 2009–2018 just because there has been QE. Merely, there is a heightened chance that markets will do well in the coming years. So don’t try to be too cute and “wait” for the next fall.
- More things are going online. It was happening before the crisis. Amazon, Netflix and smaller firms were only getting bigger. What has happened, however, is the world has pressed the fast forward button. Now things are going full speed towards online. So in my network, online teachers are oversubscribed, and traditional teachers can’t get much work. Online retailers are doing well, and traditional guys aren’t. If you can pivot online, do it.
The statistics below from Hootsuite are enlightening:
Having said that, the fundamentals are the same during a crisis as in times of plenty.
Things like staying on top of trends, trying out many ideas (webinars vs seminars as one example), investing rather than saving money, are all things that work in normal times as well.
The key difference is that the world changes more quickly during a crisis.
It depends on a number of things. Mainly it depends on:
- Where you live. The taxes and cost of living in that country
- What you are invested in
- If you have any dependents
- What kind of lifestyle you lead.
Let’s give a simple example. If you live in some areas in Eastern Europe and SE Asia, you wouldn’t need that much.
That is because most of the costs are cheap, including housing and healthcare, and travel is cheap to nearby countries.
So based on the 4% rule of retirement (see example below) you could do it for anything from $500,000 to $2m depending on your exact lifestyle:
In comparison, if you live in a high-tax or cost of living country, especially one with high medical costs like the US, $1M might not last you in retirement:
So in that case, you might need $3m+ to live the lifestyle you desire.
There are ways to doing it more cheaply. For example, instead of buying a $1m home as you mentioned, you can build your own in some countries.
I know several people who have bought places that nobody else wants, and renovated them. That takes time and effort of course though.
To best way to know your retirement number is actually to spend time living in your ideal place for 6–12 months. Many people underestimate retirement costs and run out.
Alternatively you could just semi-retire for the first 10 years. That dramatically changes the maths as you would have a small income coming in, or in some cases large income.
What is the fastest way to reach $10m net worth? This article will explain in more detail.