I often write answers on Quora, where I am the most viewed writer for investing and personal finance, with over 222 million views.
On this article, I will use my answers from Quora to answer the following questions:
- What are some of the worst financial investments you can make?
- Is there one single thing that can make you rich or wealthy?
- If you retire one day after a market crash, is that really a big deal? What strategies can be used to reduce this risk?
- How can people outside the US invest in American stocks? Many people struggle with this issue in Africa, Latin America and beyond.
- Are there any places left where you can live like a king for $1,000 a month globally?
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Historically, the very worst ones have been:
- Speculations. Speculations can pay off very randomly short-term and even occasionally over 10 years+. Yet if you are just holding an asset in the hope that somebody coming after you will pay more for it at a later date, that is speculation. A great example is technology stocks. In the 1990s technology and the internet was clearly the future and the Nasdaq has hit new record heights countless times after 2000. Yet in the 1990s there were many people who bought individual stocks, even those who were producing zero profits, in the hope that they one day would make a lot of money when the firms turned a profit. Linked to this is short-termism. Somebody who holds the S&P500 for 50 years or even 20 years certainly isn’t speculating. Anybody holding it for a year is.
- Commodities – In real, inflation-adjusted terms, commodities have merely held their value with inflation. They do have their good and even great periods. However, it is very hard to know in advance when those excellent periods will come. Gold has tended to give 0%-1% per year in real-terms in the long-term as per the graph below. Some commodities have actually deflated. They also don’t pay a dividend unless you buy related stocks like gold mining stocks:
3. Cash in the bank – historically cash in the bank has paid inflation +1% or even 2%-3%. So, cash in the bank held beat commodities over some decades. Those days are over now. These days, cash in the bank doesn’t even pay inflation in almost every country. You also face devaluation risk in some countries
4. Collectables – long-term, collectables like art, watches and vintage cars only produce 1%-3% above inflation. Wine has done relatively well but still isn’t one of the best investments:
Also, most types of illiquid assets can be very risky. People associate property as a low-risk investment, but it isn’t.
Price growth has lagged major stock markets, it is leveraged which can be a good thing but also increases risk, and you can’t always easily find a seller.
I remember somebody close to me in my family (I don’t want to mention who because they might be reading this) had to sell his house, taking a 35% loss.
The reason? He bought near a telephone mass. There were worries about cancer and these structures.
For a while it looked like he would need to just use it as a home because nobody would buy it.
I have seen numerous similar cases where because of speculation about an area being prone to flooding or something else, people can’t sell their houses.
In the UK recently, up to 4.6 million (that is about 10% of homeowners) homes can’t be sold due to cladding.
So, property isn’t the worst investment in the world, especially for professional real estate investors.
But it can be in some situations as you can be left with an asset which nobody will buy and few will pay decent rents for.
What is lower risk is using property just as a home.
It depends on if you mean wealthy or high-income. A multimillionaire is defined as a person whose assets (wealth) amounts to many millions of Euros, Pounds or USD.
You can only build up assets by living below your means and investing the surplus well.
Even if somebody inherits a lot of money, somebody can’t become wealthy by living above their means or even at their means.
$1m coming in a year after tax – $1m going out = $0 invested or saved. $1m – $1.1m spent = debt and maybe bankruptcy eventually.
When it comes to income, it is much more complicated. We can’t just look at one single thing.
The biggest one is having skills the market is willing to pay for, directly or indirectly, and knowing how to market them.
That could be hard skills (engineering, medicine etc), soft skills like people management, sales, marketing and related business skills like strategy,
Knowing how to market them is also key. A world-class doctor who is great at digital marketing, or outsources it, could earn 10x or even 100x more than a private clinic which isn’t good at those areas.
Income and wealth can either go up together or rise, or fall, at the same time.
Last year was a great example of that. Asset prices rose, especially stock markets.
Plenty of people saw their incomes fall, but their wealth rise, sometimes dramatically.
One commonality between the two is the ability to execute. People who do things, and take actions, are more likely to be both wealth and high-income, or at least one or the other by a certain age.
It doesn’t affect people who know the following facts and act upon them:
- It is foolish to sell all your investments at age 65 or 70. It is better to draw them down. So, if you retire during a crash, and you only withdraw 4%-5% per year, it isn’t a big deal. More on that later.
- You should have 30%-50% in government bonds when you retire. Bonds don’t pay as well as they used to. They aren’t sexy. But they do tend to rise when stocks fall, and offer some stability to a portfolio. It isn’t sensible at a young age to have a big allocation connected to bonds. Before retirement, it does make sense
- Somebody who retired one day before the 2000 crash, and therefore eight years before the 2008 crash and twenty years before the 2020 crash, would have done fine if:
- They would have had 40% in bonds, 30% in US Markets and 30% in international markets
- Reinvested dividends
- Withdraw a maximum of 4% of the portfolio per year
- Not panic sold during any of the three crashes or smaller downturns.
- Rebalanced yearly from the winners to the losers to retain balance and manage risk, or whenever there is a big event. In reality this means selling some bonds to buy stocks when there is a crash, and selling some stocks when they are rising aggressively. Most people want to do the opposite – they want to panic sell when markets are down and sell bonds when stocks are skyrocketing.
In fact, more than fine. The portfolio would now be worth more, adjusted for inflation, than in 2000, even with the 4% withdrawals yearly.
So, I guess the bottom line is somebody shouldn’t be “heavily” invested in stocks, if you define heavily as over 70%, close to retirement.
50%-70%, and 30%-50% in bonds, is fine provided the steps above are followed.
Having six months to a year in cash to get you through the first year of retirement also doesn’t hurt.
Remember to that the average bear market only lasts a few months. It took markets a few months to recover from 2020 and the falls of late 2018/early 2019.
In 2008 it took two or three years, and sometimes it does take longer. The 2000s was a great example of this.
Markets had just recovered from 2000 when they crashed again in 2008, meaning 2000–2010 was a “lost decade”.
2000 was therefore one of the worst periods ever to retire, yet with proper asset allocation, you would have done fine as per the example above.
The biggest risk of a market crash in retirement isn’t the crash itself. It is how investors will react to that crash.
From February 2020 until May 2020, an estimated 35% of over 65s panic sold.
I bet they are regretting that now, like they do after every crash.
It depends on where you are living,
There are usually two options:
- Do it yourself (DIY) investing
- Use an advisor or firm
In developed markets, including almost all European countries, Australia, New Zealand, developed Asia and Middle East and some others, people are spoiled for choice.
There are numerous good options for both. In which case people just need to:
- Find a DIY broker, or advisor
- Do the needed documents (application form, proof of address and ID).
- Sometimes proof of wealth is needed as well for bigger accounts (payslips, bank statements etc)
- Fund the account once it is approved
- Make the trades of course.
- Sometimes you need to provide a W8-Ben form if you want to trade US Stocks if you are non-American to deal with tax issues. You don’t need this form if you buy US ETFs and index funds which are domiciled outside the US though. The London Stock Exchange, and many others, offer ETFs which are linked to American markets. There is no need to buy the ones domiciled on the New York Stock Exchange, unless you are American. The performance will be identical it is just a different domicile.
For people who live in numerous markets in Africa, Latin America and some less developed areas in Europe and the Middle East, it is more tricky.
It is also more difficult for expats who are moving from country to country rapidly, especially if they are based in less developed areas – say an oil & gas worker or NGO staff member.
The percentage of providers who will accept for somebody who is working on an oil rig in Russia, and then will move to Angola, before finishing their career in Norway or Nigeria, is tiny.
Or maybe they will accept but won’t keep the accounts open if you move to a less developed place.
In that case finding a specialized provider is best.
The cheapest places for quality are some countries in Eastern Europe, South East Asia and a few in Latin America (some parts of Mexico and Colombia for example).
Some of the places which are the very cheapest aren’t the best places to live by any means.
Even those aforementioned areas though don’t offer a “luxury life” for $1,000 a month.
And even in those countries, your best bets are placed in the countryside or small towns in less developed countries.
It also depends on how you define luxurious. In many South East Asian countries, you can live very cheaply, but not if you want any of the following things:
- Some types of food items like cheese on a regular basis
- A car
- The ability to consume other types of imported products, be that cheese, alcohol or whatever else you like, on a regular basis
- Going to international restaurants and bars rather than local ones.
- The ability to travel internationally or even sometimes domestically
Basically, $1,000 a month is only comfortable in a few countries if you can localize your tastes, live in small towns rather than big cities, and you don’t have dependents.
The only exception might be if you have free accommodation because of your job, you have bought the place, or you are living in a two-income household.
I remember a number of years ago I spent some time in second and third tier Chinese cities.
They were obviously much cheaper than “first tier” cities like Beijing, Shanghai and Hong Kong.
Many expats, regardless of whether they were engineers, teachers or hotel managers, got free accommodation and sometimes bills paid as part of the package.
For many, the accommodation was located at their work place – like a hotel general manager might live inside the hotel or the teachers were living on campus.
A lack of bills + commuting costs + a low cost of living = the ability to live comfortably but not luxuriously on about 1k a month as it was all disposable income.
Those factors meant that even some very well paid expats tried to live off 1k a month and save more.
Often times though the people who got the best deals had a local spouse who knew the language and the “tricks of the trade”.
If you don’t have that, sites like this one are a good guide – Cost of Living – as are some Facebook groups and YouTube videos.
There is certainly better information available these days compared to before.
The only caveat I would make to the above is certain luxuries in developed countries are very cheap overseas.
Having a maid for a few hours a week or eating out regularly (in local restaurants) isn’t considered a luxury thing in many developing and even some mid-income level countries.
I do know some people who are spending 1k-2k a month who do those things.
Ultimately, being an expat can be quite different to a local in many places.
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