I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 232.5 million views in the last few years.
On the answers below, taken from my online Quora answers, I focus on a range of topics including:
- What is the most successful investing strategy? I compare professional and non-professional investors.
- Why do people keep saying that stocks will crash in 2021? I explain why people make this same prediction every year, and those who are foolish enough to listen, won’t benefit and can only lose.
- Which equities and assets will be most negatively impacted over the long-term by coronavirus?
- How can you get rich investing in US stocks?
- How can you use leverage to increase your wealth?
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (firstname.lastname@example.org) or use the WhatsApp function below.
We have to make a distinction between professional and non-professional investors.
In terms of professional investors, there have been many types of successful investing strategies.
One, as practised by Warren Buffett, is value investing. Value investing is the strategy of picking stocks that look undervalued.
That worked well until recently for his firm, and others, but beating the market has become more difficult for a range of reasons
For almost all DIY and non-professional investors, and even a huge percentage of professional investors, buy and hold works best.
The reasons are simple
- Past performance doesn’t last. Now sure, many people can beat the market over 1, 2, 5 or even 10 years. Few do it over 40 years. Those DIY investors who beat the market in the 1990s with technology picks, didn’t do it in the 2000s. I don’t expect those who picked Facebook and Netflix to continue their winning streak either. Nobody can consistently predict the market.
- Those who try to time the market eventually fail as well, because they get one or two decisions wrong, with drags down the average. For example, I do know countless people who bought cheaply in 2008-2009 and 2020. Yet most of those same people then lost money by buying and selling again.
- The more you have in your account means the more dividends you can reinvest.
- If you have a diversified portfolio of stocks and bonds, it is possible to rebalance. By rebalance, I mean sell some stocks and buy bonds if stocks outperform, and vice versa. This not only manages risks, but it also negates the need to always be able to predict future trends, as you can benefit from any eventuality, at least in the long-term.
- Taxes and trading costs compound if you buy and sell more.
- If you put in a lump sum and then add monthly instalments, you are also reducing your risks without needing to predict the future
- Markets do rise long-term, so trying to catch the downtimes is very difficult.
- The downturns and even strong bull markets, are unpredictable. Look at the last two years alone. People started 2019 in a pessimistic mood. US stocks went up 30%. Few people thought coronavirus would result in a stock market crash. Even fewer thought that they would rebound so well.
The problem is, it might be a simple strategy, but that doesn’t make it easy. Most people struggle to do this, especially when there is a market crash.
Well the media and members of the general public have predicted crashes in:
- Every single year since stock markets have existed!
Don’t get me wrong, crashes do happen. Just look at last year, or 2008. There will be many more in the future.
Yet the key things to remember are
- Wall Street and the Media have predicted 100 of the last 3 crashes. In other words, the number of predicted crashes is much higher than the normal of actual ones. It makes better TV to spread fear.
- Nobody can predict when crashes will come and how long they will last
- The average bear market only lasts for a few months, or a few years at most. Occasionally they last for 10+ years. Markets have always recovered, especially if you reinvest dividends. Even the worst performing major stock market in the last three decades, the Japanese Nikkei, has come back adjusted for dividends reinvestment.
- Study after study has shown that listening to talking heads in the media, making predictions, won’t help you beat the market.
- There is a huge difference between a loss and a decline. Nobody losses money from a decline if you wait it out. Plenty of people lose money from panic selling during the decline.
- Any investor young enough to have years until retirement should be delighted by declines, as it is stocks on half price in some cases. Imagine how much money long-term investors would have made if stocks stayed at March 2020 levels for a decade, instead of recovering quickly!
- Market timing doesn’t work. It is best to put in and forget about it.
- The “consensus” is awful when it comes to crashes. “Most people” thought global stocks would fall hard on a Trump victory in 2016, or Brexit, or a disputed Biden-Trump election. Again, nobody can predict these things.
- If you care about short-term valuations, you get into the issue described by Vanguard’s founder Jack Bogle below. He wasn’t against stock market investing when he was alive – quite the contrary he recommended it. The point he is making is that it is best to have a long-term strategy and stick to it, and not care about what happens in the middle.
So, you shouldn’t be worried about stock market crashes and smaller corrections.
You should be worried about your own reactions to the events. So many people panic sell during them, or refuse to invest extra money in the meantime, because they think a crash is coming.
The only people who should be worried about a crash are those very close to retirement who have 80%-100% in the stock market.
That is silly though, as diversification close to retirement becomes more important.
That is why a 60%-40% portfolio (40% in non-stock assets like bonds) can make sense close to retirement age.
- Invest money asap in an index fund or ETF, either as a lump sum or monthly investment. Even if it is a small amount just invest it. We are never younger than we are today.
- Hold it as long as possible, for decades
- Reinvest dividends in that time
- Add extra money to it during those years as well, such as if you get an inheritance or bonus
- Never time the markets
- Add some international exposure for diversification and bonds as well
That is the tried and tested way. For most people, for some reason, it is too boring.
It takes too long for others. So, you can try to “gamble” on buying individual stocks, timing the stock market etc.
It is unlikely to work long-term though, especially as a non-professional investor.
The keys are
- Starting at a young age, to take advantage of compounding
- Emotional control during the bad times.
- Only trying to control what can be controlled, and not worrying about other things.
- A long-term focus.
- Don’t get overexcited by the short-term. If you picked Tesla and it rose 700%, don’t assume you will always be able to do that.
There is an alternative way. Index with 80%-90% of your investment and use 10%-20% to take big bets.
That way, you will be satisfying that “gambling” urge in a safer way than putting 100% of your eggs in one basket/stock.
There are many ways you can attempt to do this. Firstly, you can simply keep investing your money in assets which are likely to appreciate long-term.
In other words, putting money in the S&P500, or similar stock markets, and alternative assets, which are tried and tested over decades despite the volatility.
Then, you have business investments. If you have already made a bunch of money in an industry, money can add fuel to the fire.
It can allow you to run ads, employ people, expand, buy licenses etc.
Yet, of course, business investments are riskier than buying and holding broadly-diversified assets long-term, because they depend on:
- Your health
- Your competitors can sometimes steal a march, whereas buying assets isn’t a zero sum game.
- Regulations not changing too much to make profitability impossible
- Other people like business partners.
- Sometimes the economy. Look at many companies suffered due to lockdowns.
- Continued innovation.
There are many moving pieces, which is why it is common for over-performance not to last.
Linked to that, if you mean leverage in terms of debt as opposed to the non-literal meaning, you can leverage using real estate or using debt to grow a business.
Leverage can work well in real estate as the example below shows:
Yet risks remain. It is true that you can use other people’s money to buy real estate (in this case the bank’s money), and get a tenant to pay the mortgage.
It is also true that when interest rates are so low, you can use borrowed money to fund business expansion.
If you are getting 20% consistently from running ads, and the bank will lend you 200k at 2.5% interest, you can see that you could make a lot of money.
Yet the keys are a good risk-adjusted return. I have seen so many people “leverage up” and do well for years, and then eventually suffer.
I also answered this question on the adamfayed.com Quora Space.
In 2008–2009, it was the banks. They never fully recovered from that point.
In fact, they have never came close to recovering. Will the same thing happen with the airlines and other firms affected this time?
Nobody knows for sure. The future is very difficult to predict. I suspect that firms relying on big crowds and the face-to-face economy will suffer the most.
The reason is simple. We were moving into an online and digital world before Covid.
What happened simply forced the world to press the fast forward on that existing trend.
Even some people who weren’t joining that trend, like some older people, got used to doing things in a new way.
That isn’t to mention that some people will be worried about going into big crowds again.
Now sure, there will be some pent up demand. Some people can’t wait until they can go to football matches and nightclubs again.
Yet a percentage of people are also very worried about joining big crowds again.
We have seen that when lockdowns have been lifted – demand hasn’t completely returned for those services.
I do think global travel will eventually recover in 3–5 years, but I could be wrong.
So, I suspect that many hospitality firms will be hit hard. The ones that survive and buy out the weaker firms could become stronger though.
Take the airlines. The ones that survive could hike fares if there are less competitors.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 233 million answers views on Quora.com and a widely sold book on Amazon
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