I often write on Quora.com, where I am the most viewed writer on financial matters, with over 260.1 million views in recent years.
In the answers below I focused on the following topics and issues
- What often repeated investment advice is actually a load of bull? I look at some of the biggest misconceptions out there, including some held by investment professionals themselves.
- Which types of people are most likely to become self-made millionaires? Business owners, the inherited wealthy or those who invest? I speak about some of the commonalities I have observed.
- How do Japanese and Americans invest or save considering zero percentage interest rates? I explain a key cultural difference between the two countries I have observed, but also say why I think Japanese attitudes to saving might soon change.
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There are several misconceptions out there.
The biggest ones are
1.Risk and return are always connected. They are usually connected, but not in all situations. In some cases, you are just taking more risk for no extra return. For instance, emerging markets are riskier than say the S&P500 index.
Long-term it has also done worse! In other cases, you can make higher returns with lower risk. For example, stocks are riskier than bonds if you are a short-term or even medium-term investor. If you are ultra long-term, a stock index isn’t riskier than a bonds index.
You can get more (due to compounded returns), at lower risk than keeping your money say in the bank, provided you are long-term and don’t give a damn about the volatility. People should only be long-term anyway as per this quote:
2. Investments should always be related to our risk tolerance. If we go to the doctor, he/she doesn’t care about what our attitude to health risk is. Investing isn’t an exact science but we do know what works and what doesn’t.
Just because somebody’s attitude to risk is X and Y, doesn’t mean they should be in such investments. A lot of people’s attitude to risk is connected to some misconceptions, like volatility is always the same as risk.
Listen to some of Nassim Taleb’s work on this or Buffett himself speaking about how a lot of what is taught at business school is nonsense.
3. This time is different. This is seldom repeated during the good times. Every time there is a crisis, it comes up. Unsurprisingly, it came up during Covid-19:
4. Only invest in what you know. Now this advice isn’t completely nonsense. Yet I have seen several people make some huge mistakes here. For example, putting 100% or even 50% of your wealth in your company’s stock, which therefore means you are doubling your risk. If the company goes bust, you lose your job and money.
Or plenty of doctors might fancy themselves at picking healthcare stocks, without looking at the investing fundamentals, or even knowing how to do it.
Investing in what you know does work if you have a successful business or you are a professional stock market investor. Doesn’t always work for the average DIY investor though.
5. You need to be widely diversified. Diversification does make sense.
It doesn’t make any sense to be 100% in one stock or even ten of them, unless you are a professional investor.
Yet the S&P500 or MSCI World is already very diversified. What’s more, if you are in your 20s, 30s or even 40s, a big stock market crash won’t affect your retirement plans.
The crash will come and go in months (like the 2020 crash) or a few years (like 2008–2009) most likely.
Wide diversification is often more important for very old people, or those who are very wealthy and trying to preserve.
6. Asset protection is more important than building wealth.
This is a myth out there amongst many advisors. It is facilitated by what I would call “The Westminster Bubble” , or the “echo chamber”.
They take exams, and hear from regulators, who say (in some places anyway) that insurance and asset protection is more vital than investing.
Only in limited situations is this correct. Few members of the public believe this one.
7. Regulation is only a good thing.
Some very specific regulations can be good, but it can also cause more hassles than it is worth.
More regulations increase the price of some forms of advice. It can also increase risks.
Why did many banks become too big to fail? Many smaller banks couldn’t cope with the paperwork and regulations.
They needed to merge with the larger banks. The same can happen in financial advisory.
We also see this in pensions. Pensions are the most regulated product, probably, in the world.
The returns, on average, are also lower than the average brokerage account, often due to increased regulatory costs.
The idea that well regulated solutions are always superior to less regulated ones, is therefore not true.
Regulation tends to only work when you ensure people have skin in the game.
In India, there was a record increase in the quality of school dinners after the government bought in a rule that the head teachers needed to eat their own lunch!
I doubt that there would have been such a great increase if the government had focused on licenses, training etc.
The same is true in finance or many other industries for that matter.
Regulation often doesn’t work well, and can cause moral hazards, if it is just focused on increasing costs and making people jump through regulatory hoops.
Like many of the things mentioned above, it depends on the situation and circumstances.
Firstly, I agree with Brian’s analysis below. In this day and age, it isn’t that difficult to become a multi-millionaire.
That is assuming you don’t mind getting there in your 40s, 50s, 60s or 70s.
The maths he presents is correct. However, this shows that one group of people is likely to get wealthy – those who invest long-term.
You don’t need a super high salary. You don’t need to be super smart.
You just need to be long-term orientated, persistent and focused.
Another group of people who are likely to become multi-millionaires are business owners.
Not the majority. Most businesses go bust as per the stats below:
If we extend the timeframe to 10 or 15 years, the failure rate is higher.
But one of the reasons for the high failure rate is people focus too much on “the dream”.
Few focus on getting good at something and then starting a business with that industry experience.
Other people get inheritance, even though that isn’t any longer the norm in most countries as per the below graph:
What is the community here? Most people who become multi-millionaire own assets.
That could be a business, ETFs, stocks, real estate, digital assets etc.
Even people who inherited the wealthy usually inheritance assets or cash from selling assets.
Becoming very wealthy from earning loads of money and keeping it in the bank is possible, but much more difficult than owning assets.
it is even more difficult to stay wealthy using that method because you need to constantly earn more to keep the show on the road, and also keep adding more to your savings now the banks pay below inflation.
As asset prices historically inflate more than wages, it makes sense for even the very highly-paid to use income to invest.
Firstly, this isn’t an American or Japanese only issue. About 99% of the world’s countries now either have very low interest rates, or have higher interest rates with considerable risk.
By considerable risk I mean the risk of inflation and currency devaluations.
A small number of countries still have high interest rates in USD, like Georgia and Cambodia, but that has its own risk.
If it didn’t, why wouldn’t the whole world open bank accounts and get 5% without risk?
However, in terms of your question, there is a significant cultural difference between Japan and many advanced Western countries (especially the US).
In the US over 50% of people invest in the stock market:
Also, an increasing number of people understand that asset prices, such as property and especially stocks, go up long-term even if they are volatile.
Just have a look at a long-term graph of the S&P500, Dow Jones or Nasdaq.
In Japan, in comparison, property prices haven’t recovered from the Bubble Years.
The Nikkei hasn’t either in capital value terms. As I have mentioned before, it has recovered if somebody just reinvested dividends.
It is now at about 30,000. The height was 38,000, meaning that if somebody was unlucky enough to invest 100% right at the peak of the market, they would be marginally up if they had waited it out.
It is highly unlikely, moreover, that somebody would have put 100% at the very peak.
If somebody had invested monthly from say 1978 until now, or even from 1995 until now, the returns would have been quite good.
If somebody has invested in both the Japanese and US stock markets for decades, the returns would have been even better.
Yet these are nuanced arguments. To the average layman, stocks seem risky.
Stocks don’t always recover, even though the general market already has on the aforementioned measure.
Things are starting to change though. Some younger people are investing now in international, and local, markets .
Once the Nikkei breaks through the previous high of 38,000 again, I think that will further change people’s mindsets.
Right now, many people just keep money in the bank, but that is likely to change.
Unless interest rates increase a lot, one of the reasons for this is that, as you say, it is pretty difficult to save your way to retirement!
These issues aren’t just Japan-specific though. In many countries, stocks are depicted by the media as being risky and akin to a casino.
Those who actually know about investing, or have advisors, tend to invest.
So, wealthier Japanese people are more likely to invest than others.
Perhaps the Japan-centric issue is the very specific way asset prices, and indeed inflation, has behaved since the 1980s.
The fact that Japan has struggled with low inflation, and even deflation, over decades, has also changed the incentives.
You might get about 0.1% in the bank, but inflation is often at 0% or below.
The difference in America is that the average middle-class person started investing sooner than in Europe, Japan and most countries.
With the younger generations, and more online brokers who can accept smaller minimums, this is set to change globally.
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Adam is an internationally recognised author on financial matters, with over 260.1 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 the following issues and subjects:
- Why is an online business effective to achieve wealth? I look at the recent European Super League in football to illustrate a wider point about why many traditional businesses lose money. How can online businesses help owners make higher profits?
- What factors influence retirement the most? Your decisions, the economy or something else?
- How should you invest money retirement in five years is your goal?
- Why do people buy stocks when the price is high? Is it always irrational to do this, or could there be times when it makes sense? I look at the technology stocks, and Nasdaq, to illustrate a wider point.
- Is real estate really a great hedge against inflation? What can we learn from the current real estate market where residential is doing well in most countries, but commercial (such as office building) is struggling?
To read more click on the link below.