I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 230 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:
- I was asked “what is your biggest financial mistake and at what age did you make it?”. How did I respond to this question? I give an example of another person I know to illustrate a common mistake that I have made, and so have many others.
- What do people get completely wrong about investing in the stock market? I give a few examples including the idea that stocks markets are risky, Japanese equities have been a terrible investment and you need to be super smart to be a good investor.
- What are the advantages of keeping cash over investing in the stock market, considering it carries so much inflation and devaluation risk? Can I even think of one?
- Is it possible to earn 30% in a day in stocks? Some people are under the impression that this is possible on a sustained basis, but is it really true? If it is true, why isn’t Soros, Buffett and others getting on the gravy train?
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What was your biggest financial mistake and at what age did you make it?
A few years ago I met a middle-aged British man in South East Asia.
He is a lawyer, who still lives and works in the UK, but spends 2–3 months of the year in Asia, as he teaches law at a university which has long holidays.
We got speaking about investments. He got into rental properties during what I will call the golden era of UK property investments.
The 1990s, early and mid 2000s was a much better time than the 1980s or now for that kind of investment.
Taxes were lower than now, the economy was booming every year from the early 1990s until 2008, interest rates were low and it was possible to leverage up with 95%-100% mortgages.
He made a lot of money. He says that he averaged 17% per year net of fees, and I believe him, if you include the capital values and rents.
His confidence was obviously super high at this point. He didn’t consider that luck could have played a part in this success.
Therefore, he put a substantial part of his net worth in a property in 2006.
To cut a long story short, the property did badly, he sold out and made a loss.
As he put a good amount of his net worth in this project, but fortunately not everything, his average returns were down to about 4%-5% per year.
He went from beating the average returns of the S&P500 and FTSE100 for close to twenty years, to being far below the averages.
He would now have been better off being a passive investor. He would have made more, for less hassle and costs.
The lessons I took from this are
- Over-performance doesn’t always last, especially in areas which are prone to government policy changes (owning businesses, property etc).
- Complacency is a disease.
- Diversification is important. If he wasn’t complacent as per the last point, he would have diversified away from property after such a lot of success AND kept to his previous position of owning many properties, rather than putting a reasonable chunk in one property. If this property was 5% of his total portfolio, it would still have been painful, but not as destructive.
In recent years since then, taxes have only compounded on property as well.
Many buy-to-let landlords have got out, so I doubt his portfolio has improved much, at least net of these costs.
I have seen the above pattern a lot when it comes to people who buy individual stocks, and especially those who have medium-term business success.
Even people who aren’t prone to arrogance and complacency can get carried away if the over-performance lasts for more than a decade.
The reason I mention this is that, I too, once got carried away by short-term performance.
Fortunately I made it at a very young age (18–21 mainly).
What are some things movies get hilariously wrong about being an investor or the stock market in general?
The biggest misconception of all about the stock market is that it is risky to invest.
Few people know basic facts like the stock market has outperformed other assets, including property, in the ultra long-term, and cash isn’t risk-free.
It gets eroded by inflation. This one is improving though as more people educate themselves online, by looking at historical graphs, charts and figures.
Provided you hole the entire market (ETFs) for a long period of time, and reinvest the dividends, you aren’t taking a big risk.
If you hold it in tandem with bonds, the risks are even smaller:
Apart from that here are some more
- That the Japanese stock market has performed especially badly. It has performed badly compared to almost all others, but somebody who would have reinvested dividends would now be up from the peak. The capital values are still about 20% down, but dividend reinvestment would have made a huge difference. A bit like if you own a house you can still make money if the capital values are down due to rental incomes, the same applies to stock markets even though most go up in capital value terms as well.
- That diversification is now stupid. Take the aforementioned Japanese point. If somebody would have invested say $100,000 at the height of the bubble economy, and never added a penny apart from reinvesting dividends, they would now be up. It is still a disappointing return though – 1% per year above inflation or so – but shows patience can pay off. Now imagine that investor had put a third in the Japanese stock market ($33,333), a third in a bonds index and a third in the S&P500, they would have earned about 4%-5% after inflation.
- All investors are rich or high-income. Many have normal jobs, and have become wealthy slowly.
- That stocks do well or badly under certain conditions. This one allows surprises people. Stocks can go up, and down, under wars, pandemics and various other events. It is pretty normal that they will even soar during unexpected times such as government shutdowns. The fact that stocks did well during lockdowns in 2020 isn’t surprising for those that have read the historical data.
- That people can predict, and time the stock market, consistently over decades.
- That countries with higher GDP growth will see superior stock market performance.
- The idea that you have to be especially intelligent to do well in the markets. In fact, emotional intelligence and controlling emotions is more important.
- That the fundamentals of investing have dramatically changed recently. Most of the basics are the same.
Recently I would add another one too. That one is that making money in individual stocks is easy.
This one goes around in circles. In the 1990s people thought beating the market with stocks they “like” was easy.
That ended in the 2000s. Even as recently as 2017 or 2018, many people realized they couldn’t beat ETFs.
In the last year or two, some younger people in particular think they can beat the market easily, even though they aren’t finance pros.
That will change again in time I am sure.
What are the advantages and disadvantages of investing in the stock market as opposed to keeping your money in the bank?
There are really no advantages of cash these days as some people have mentioned below.
Now sure, keeping some cash for emergencies and cash flow makes sense, but that isn’t an investment.
Cash is riskier, especially in the world we live in now and if you have a long-term horizon, for less reward.
Ray Dalio said a few months ago that cash is the riskier possible asset you can own:
And I agree with him.
The only possible disadvantages of the stock market vs cash is if you use it incorrectly.
The biggest risk in investing is staring yourself in the mirror……yourself:
Stocks have gone up ultra long-term in every major country now, even in Japan, if you reinvested dividends.
Yet so many people lose out because they:
- Aren’t long-term enough. Time is one of the biggest ways to reduce risks. Investing in the S&P500 for a year is risky. Five years isn’t that risky but some risks remain. If you invest for thirty years you would have to be very unlucky to be down, and it has never happened before.
- Aren’t diversified enough in global and local stock ETFs and a bond market index. Every dog has its day in investing, so it is best not to just focus on recent performance.
- Don’t reinvest dividends, which is a key mistake as dividends have historically given more than 50% of the return of many stock markets.
- Listen to the media too much that this time is different every time there is a crisis like 9/11 or Corona.
- Panic sell whenever there is a crisis – such as a dramatic fall in the markets.
- Speculate too much in individual shares or they try to time the perfect moment to get into the stock market, which is almost impossible even for professionals.
- Let their emotions get the better of them, which is connected to most of the points above.
- If they have already done the right thing and been long-term, diversified and reinvested dividends, some people don’t change their asset allocation as they age. Bonds don’t pay that much any more but having more during the “preservation phase” (close to retirement) makes sense.
Yet those aren’t stock market specific risks, they are personal risks linked to human emotions.
Cash just makes people feel safer as the amounts don’t fluctuate so much, but volatility isn’t risk.
Are high profit (30% a day) investing websites real?
Consider this. The general stock market has “only” gone up by about 10%-11% per year since 1945, with the Nasdaq doing a bit better.
Berkshire Hathaway is one of the few stocks which consistently beat the S&P500 until recently, when its over performance has stopped.
It has “only” increased by about 25% per year:
30% a day compounded would make anybody one of the richest people in the world within a few years, even on a tiny original investment.
If that was the case, then everybody would do it, and become a billionaire.
It is ironic though that some people think 10% or even 8% is “too good to be true” when it is a fairly average long-term return on the stock market, and some other people think 30% a day could be realistic.
I would stay away from websites like this, and stick to long-term investing.
The good news is you don’t need 30% in a day or even a year to get wealthy slowly from investing.
Decent returns compounded for long period of time will do that for you.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 231.2 million answers views on Quora.com and a widely sold book on Amazon
In the article below, taken from my online Quora answers, I spoke about:
- Is there any 100% risk-free investment available in the world?
- Will the stock market skyrocket after Covid ends, as most people think, or could we have a surprise in store?
- What is the most scientific approach to making a profit in the stock market, or is that the wrong way of looking at the question?
- Why do Mainland Chinese investors prefer to invest in real estate over stocks, or is it more complicated than that? I speak about my experience in the local market, having lived in Shanghai.
To read more click below