In the answers shared today I focused on:
- What is my favourite stock strategy and why?
- How common are “rags to riches stories”, and how should we define riches anyway?
- Should people invest in one go, as a lump sum, or monthly invest?
- Do people really sacrifice their health for wealth?
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We are on the second day of 2021. This time last year, few had heard of the coronavirus, let alone lockdowns.
By late February and March, there was panic in the stock markets and panic buying in the supermarkets:
People were saying what they always say……this time is different! It was said in the 1930s, when Hitler was rising to power, WW2 was occurring, 9/11 happened and 2008–2009 was in the headlines.
I am sure it will happen during the next crisis too. Anyway, what happened during 2020?
- US Stock markets were up over 17% in general, with the Nasdaq outperforming, up 43%, the highest for 11 years
- Many European markets which haven’t done particular well recently, like the Danish or Finnish market, did very well.
- Underperforming Asian markets like the Taiwanese, Chinese and South Korean markets did well. Stocks in South Korea were up 37% on average – making it the best performing market of the year.
- The worst performing markets were in places like Brazil and the UK.
- Tesla was up 700%, with some other stocks up by over 1000%.
- The Nasdaq doubled from the worst of the crisis in early March, with most major indexes up 60%-90% on March.
- The Japanese stock market, the Nikkei, also performed well.
- Short-term government bonds outperformed gold, silver and pretty much every other asset in the brief period where markets were panicking.
- The best time for stock markets was in early-mid November, despite a disputed US election and a second European lockdown. People forget that now. They assume markets soared as the vaccine was discovered in November. They did increase after that, but they were rising in November in any case. So just like in 2016 when people were amazed that markets soared after Trump’s victory, people were taken by surprise by skyrocketing markets in the face of a US election result which was unclear for days.
I don’t know anybody who managed to predict even half of these trends. I do know some sensible people who said things like “don’t panic” and “nobody can predict the near-term future”.
I said it many times in 2020 and for years beforehand. So much so, that most of my followers know the advice in advance.
So my favourite stock market strategies are quite boring. They are:
- Be diversified. Every dog has its day. The South Korean stock market had its day in 2020, as did the Nasdaq and some others. Over time, that will change. The UK and Japanese markets might outperform this year or in 2022, as an example.
- Buy and hold long-term.
- Buy the whole market through ETFs and keep individual picks down to 10% at most. Purchase both stocks and bonds, so I can rebalance if a crash happens, and manage risk.
- Reinvest dividends
- Don’t be put off if an investment isn’t doing well for a few years, or get too excited by short-term performance.
- Never speculate.
If you do that, you can beat 90%+ of people long-term.
There are a few tried and tested ways. Firstly. it depends how you define “riches”.
If you mean become a multi-billionaire, and go from a poor background to one of the richest people in the world, that takes some luck.
There are few billionaires in the world:
Most are self-made. Most also tend to work hard, smart, take calculated risks and so on.
Yet there are many other people who have the same qualities who aren’t that rich.
In comparison, if somebody wants to become a millionaire or even multi-millionaire it isn’t difficult if:
- You are from a developed country, and some mid-income and developing countries. Fortunately there are few dirt poor countries these days compared to 20–30 years ago, so the number of people who can afford to save and invest has gone up a lot.
- In addition to number one, you have the basics – a job. Basic levels of health and so on.
- You start small from a young age. Start investing tiny amounts – even $50-$100 a month as a student with a part-time job. Increase if after you can afford to in your 20s and 30s.
- Reinvest unexpected money from bonuses, inheritances etc.
- Invest in ETFs like the S&P500 long-term. By long-term I don’t even mean 15 years. I literally mean forever – from your late teens all the way through to retirement.
- Hold 3–4 ETFs to reduce your risk. Learn about asset allocation in books or hire a professional to do it for you.
- Invest your money. Don’t save it.
- Don’t speculate. Being an investor and speculator isn’t the same thing.
Statistics show that the average millionaire is middle-income and middle-aged.
Over 30% of millionaires in places like the US and UK are estimated to be teachers, mid-income managers, accountants etc, with over 50% being from various mid-income level professions.
So, the “boring route” to “riches”, which means get wealthy slowly, isn’t difficult.
If you want to become very rich, or also have a high-income as well as get wealthy (wealth and income are very different) you need to learn different skills.
Money management skills, a long-term mindset and good decision making is enough to get wealthy slowly.
If you want to do it more quickly and aggressively, you also need those skills in addition to others such as business-related skills, or high technical skills in certain situations.
It also depends on how much risk you want to take. The aforementioned slow approach isn’t very risky at all.
If you want to be more aggressive, sometimes you need to take more risks.
An example of that is being willing to be paid on performance and not salary.
It is a good question, but I would add something important before answering your question directly.
Namely, few people need to make this “trade-off” now. Working 20 hours a day forever, in a job or business you hate, is only one route to success.
A lot of wealthy people have gotten there without affecting their health because they have used leverage.
Examples of leverage include:
- Leveraging time through compound returns. Many “get rich slow’ people have just invested for decades to get to millionaire or multi-millionaire status. What’s more, the lions share of wealthy people are like this. It is only once you get to people worth $5m-$10m+, that you see more of the private business owner types.
- Leveraging technology. These days, due to the internet and the ability to use adverts and the like, working hard isn’t as effective as working smart in many situations. Who do you think will gain more traction in 2021? The person who makes 250 cold calls a day, or the wealthy business owner who has a budget of $10,000 a month, and can therefore get in front of millions of people a month? The answer is obvious. Now of course, it takes time to get to that point where you have such a budget, but you get my point.
- Leveraging other people. Despite technology getting bigger over time, it is still possible to leverage people to do work for you. Leveraging technology and people is another example of leveraging time. We only have 24 hours in a day, but technology and other people can buy more.
The only people I have seen that fall into this trap are:
- People who love what they do, so they work so hard due to this passion. If you love what you do though, it is less likely you will be stressed
- People who are so afraid of poverty due to their childhood that they work excessive hours, even in a job they hate, and even though they have enough to live.
Yet these people are a small percentage of the totals. The reality is that the average wealthier person has far better health outcomes –https://www.apa.org/monitor/oct01/wealthhealth
This means that average life expectancy is higher, as is the average quality of life during a lifetime.
It is very easy for some Marxists and others to reassure themselves that they have really made the correct life choices, because well “those wealthy people are foolish as they will need to spend loads of money to fix their health which they lose due to their obsession with getting wealthy”.
It is an example of wishful thinking, and people who tell themselves that are often letting their political views affect their judgement.
In reality though, this isn’t the overall picture. As technology becomes a bigger aspect of our lives, it will become an even smaller percentage of the totals as well.
That doesn’t mean people need loads of wealth to be healthy of course, nor does it mean that some wealthy people won’t get sick early due to bad choices or bad luck (genes and so on).
It merely means that on average wealthier people have better health outcomes.
There are different ways to look at this question. The simple answer is you should always invest what you have upfront.
Market timing doesn’t work. Even investing 100% of what you have over a period of say 10 years (dollar cost averaging yay investing monthly) only beats lump sum investing 33% of the time:
The main reasons for that are:
- Markets do usually go up over time. Usually they hit records every few months or years. There are exceptions to that. Even the best performing markets like the US Stock Markets have had 10–15 year periods where they are stagnant. During such periods dollar cost averaging can win. Another example would be the Japanese stock market. People who have invested monthly in the market since the bubble have done much better.
- In reality, we need to dollar cost average anyway, because 99% of us either have a salary or will need to put in every few months or year. Hardly anybody only has one big lump sum which needs to last forever.
- If you invest in one big go, dividends can be reinvested to a greater extent.
- It is possible to construct a portfolio which is diversified enough in stocks and bonds to be safe long-term.
- Markets tend to skyrocket during certain limited periods. So, November 2020 was such an example. Many stock markets rose 15% in one month. Often times, if you miss out on those breakthroughs, markets won’t return back to the previous levels, even during a crash. It depends on the crash of course, and many things, but that can be the trend.
- If markets crash hard, sometimes they only stay at that low point for a few days.
- If you try to dip your toes in, even if you do time the markets well, you may miss out. Let me give you an example. Let’s say person 1 had $500,000 on January 1, 2020. They were worried about markets. They then saw markets crash in late-Feb/March. This lead to them buying at the very best time – in other words on the best possible day to buy. All of this is unrealistic of course because very few people can do perfect timing, but I am merely using this as an example. Now let’s say they invest just $50,000 as they are worried markets will crash again. They leave the $450,000 in cash. How much would their portfolio be worth now? About $540,000 because the $450,000 was in cash, earning 0%. The $50,000 would have increased to about $90,000. In comparison, somebody who invested $500,000 in the S&P500 on January 1, 2020, would now be sitting on about $520,000. So, the first person made 90% quickly, but on a small amount of money,
All of this means that it is most productive to invest what you have asap as a lump sum, and then invest monthly from new, fresh, money.
With that being said, it does make sense to keep some money as an emergency fund.
In the article below, I spoke about:
- What habits and mindsets are needed to become a successful business owner or investor?
- What are some of the things that the average person gets wrong about investing? I look at the 1990s to explain an important concept.
- Why do many people hate successful people? What does it show about them?
- Everybody makes mistakes – poor and rich people. Yet what mistakes are poorer people more likely to make, and make specific mistakes are richer people more inclined to make? Also, is it possible that some people that have relatively poor salaries are actually quite wealthy?
To read more, click below: