I often write on Quora.com, where I am the most viewed writer on financial matters, with over 357.1 million views in recent years.
In the answers below I focused on the following topics and issues:
- What should one do in the event of a financial crash?
- What is opportunity cost?
- Why bonds dead and a bad investment?
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Source for all answers – Adam Fayed’s Quora page.
What should one do in the event of a financial crash?
The quote above sums it up. Usually to do nothing works out more profitable than doing something.
There is a simple reason for that – markets have always came back and when people do something, they usually do the wrong thing.
Here is how long it has taken markets to recover in the past:
Therefore, holding on makes more sense. It took only 2–3 years for markets to recover from 2008, and about 6 months from 2020.
It is true that taking some action can be profitable, for example:
- Rebalancing towards stocks. Let’s say you have 200k in your pot, and 50k is in government bonds or non-correlated assets which haven’t gone down by much. In this case, selling some of the assets which are performing in favor of stocks that are crashing makes sense. Simple example. Your portfolio is down to 150k, from 200k. You sell 30k worth of short-term bonds which are up, or even, and buy cheaper stocks. When stocks recover, your 200k will be worth even more.
- Reinvest dividends from the markets, back into the portfolio
- Keep investing fresh money as normal
The problem is, most people who take action don’t do this. They are more likely to either panic sell or hold off on new injections.
Panic selling is very unprofitable as 2020 showed:
What is opportunity cost and joint cost?
The below equation is a simple explanation:
Some examples are
- If you go to university, you might earn more long-term, but in the meantime you are earning less. This becomes a bigger opportunity cost when you are a mature student.
- If money is left in the bank, earning 0.1%, then you are losing out compared to investing the money
- If you buy a house in cash with 500k after getting an inheritance, and the maintenance and bills cost 10k a year, then you might lose as much as $5m over a 30–40 year period, if you had have invested the money in the stock market, even if the house goes up by 3%-4% per year.
- Changing your residency from a low-tax to high-tax, country, will cost you more than the direct cost of the taxes, as you could always invest and compound the saving.
- Small daily costs could add up to a million, or more, over a lifetime.
- The time spent studying a language, or learning a new skill however beneficiary, could have always been used on something even more useful
- If you spend $5,000 on vacation, rather than paying off the credit card with 15% interest on a balance of 5k, the true cost of the vacation is $6.033. That doesn’t mean that going on a vacation is always a bad decision, merely that it has an indirect cost.
In many ways, it is common sense. Every decision has direct and indirect costs and benefits, so even if you are directly “winning” from one decision, it could still indirectly cost you.
Indirect, and slow, losses, seldom bother people as much as direct hits though.
Are bonds a bad investment?
Historically, bonds haven’t been a bad investment. They have beaten cash, bonds, and gold:
What is more, bonds aren’t as expensive to insure as some physical investments.
The issue is that things changed after 2008. Bonds have paid little for over a decade now.
So, the above 3.5% after inflation average is now about 2.5%. The major benefit of bonds is now diversification.
Bonds can go up when stocks go down, or at least now fall as much. The best example of this is short-term bonds.
They are less volatile than long-term bonds and much less than stocks. They went up in 2008 and US Treasury (short-term) did OK in the 2020 crash.
This means that a bondholder can sell some of the bonds, and rebalance towards stocks that are falling.
In addition to that, we have to remember a basic issue that investors have – recency bias.
Japanese stocks have beaten US ones since 1945 as per the video below. They have also outperformed many stock markets since 2008
Few people know that because the performance since the peak bubble has been bad.
Likewise, in the early 1980s, many publications were speaking about “the end of stocks?”
Why? Well, the US stock market was stagnant for 17 years, even adjusted for dividend reinvestment.
We saw the same thing in 2010, after a lost decade for the US stock markets. People weren’t keen on investing in stocks.
Yet from 1982–2000 and 2010-present, stocks have done very well – better than 99% of people thought in the beginning of those periods.
The point is just because bonds aren’t performing well now, doesn’t mean that will always be the case.
Bonds might not beat stocks ultra long-term. They never have done, even in the heyday.
That doesn’t mean they are dead though.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 401.4 million answers views on Quora.com and a widely sold book on Amazon
In the answers below, taken from my online Quora answers, I spoke about the following topics and issues:
- What could 2022 hold for the global stock markets, given the current volatility we are experiencing?
- What is more useful than mere monetary wealth, apart from time and health?
- Should people be afraid of inflation, considering wages usually keep pace?
To read more, click on the link below