I often write on Quora.com, where I am the most viewed writer on financial matters, with over 531.4 million views in recent years.
In the answers below I focused on the following topics and issues:
- What should you do after winning the lottery? How do you invest the money?
- Why do people think that by moving abroad, they are making more money, when in fact, the higher cost of living offsets the higher income?
- Do you think investing in stocks really make money?
- How can outsiders become game changers?
- How can one avoid a modern-day Ponzi scheme or an investment scam?
- How did Elon Musk make billions of dollars suddenly out of thin air?
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Source for all answers – Adam Fayed’s Quora page.
Table of Contents
What should you do after winning the lottery? How do you invest the money?
It is a good question because stats show that many lottery winners become broke, and then need to work again.
This guy won millions:
This is him now:
Obviously he didn’t plan.
The key thing is understanding risk and what you want to achieve.
After winning the lottery, or for that matter a big inheritance or selling a company, most people are looking for either economic security and/or to lead a good lifestyle.
Both are possible, but you have to remember the basic facts:
- Long-term, inflation has been running at about 3% in the last two or three decades
- Those long-term trends can always change, as we saw when inflation increased to 7%-10% in most countries in 2022
- Cash has always lost to many other investments long-term, and has been losing to inflation since 2008. Compounded, that is huge. The below graph illustrates it well.
- It therefore isn’t a safe option to only be in cash. In fact, it isn’t safe to be 100% in bonds, REITs or stock indexes either, unless you are still working
- Studies show you can only safely invest 3%-5% of a portfolio per year, even if it is invested well, to limit the risks of running out. On a $10m win that is 300k-500k. Yes, there are ways you can earn more, from high-dividend stocks and real estate, but then you are pushing up the risks.
So, basically, you need to plan and then invest in a diversified way.
Why do people think that by moving abroad, they are making more money, when in fact, the higher cost of living offsets the higher income?
It depends on the following things:
- Where you are from and the associated cost of living
- Where you are going and the associated cost of living
- Lifestyle and how much self-control you have
The last point is the most underrated aspect of becoming an expat.
Many expats, especially in sectors like oil&gas, get paid more for hardship locations.
In an easier place to live like Singapore, salaries can sometimes be lower than going to say an unstable country.
Most of these posts come with bigger salaries, housing and many allowances and so on.
Yet many expats still fail to save and invest much. Why?
Back home, most people don’t act like they are on holiday.
The majority of people won’t go out on a Wednesday evening for ten drinks, or a luxury brunch every weekend.
In far flung places, or even in places like Dubai or Hong Kong which aren’t hardship location but have loads of distractions, people tend to live a different lifestyle to back home.
London, on average, is more expensive than Dubai or Singapore, with much higher taxes, yet I know many people who save LESS once they go overseas, even if the salary and cost of living is higher and a low or zero percentage tax bracket is achieved.
The same thing is increasingly happening to many non-traditional expats, like digital nomads.
It is easy to mover to places like Malaysia, Thailand and other relatively good value places and think you can save and invest more due to having your previous income from work or an employer.
You can if you are sensible, but many people do get taken in by the distractions.
Remember websites like Numbeo only take into consideration the assumption that you will lead a similar lifestyle in both places:
Lifestyle inflation is normal after living overseas.
That is fine if you can save more adjusted for the lower taxes and sometimes higher income, but often can result in sometimes even high-income expats becoming broke at retirement.
Do you think investing in stocks really make money?
Most people have seen the statistics about how much $1 in Amazon would be worth now, or how much every $1 invested in the S&P500 would be worth now.
The S&P500 has done 10%-11% compounded per year, on average, since 1945, which is about 6.7% per year.
Small caps have done even better
So, why don’t more people make good money from the stock market?
A study which looked at 26,000 stocks was done which found that:
- Only 4% of stocks on the US stock market kept pace with Treasury bond bills
- Just 87 stocks accounted for half of the stock market’s returns……87 from 26,000
- 1,000 resulted in 100% of the stock market’s gains.
- The three facts above are slightly misleading as some of the 26,000 include pink sheet and small cap stocks. However, even for stocks listed in the S&P500 (500 companies in total), 20% of the stocks account for 80% of the stock market’s performance over most time periods.
So, one of the issues is many people are looking to find the next Amazon or Apple, in other words, the needle in a haystack, rather than owning the haystack, even though:
- Owning the whole stock market will guaranteed that you own the next Amazon, only that you will also own many underperforming stocks too
- Most people aren’t finance professionals
- Many finance professionals can’t find the next Amazon either.
Apart from that, one of the biggest reasons is emotions.
We have seen it in its most extreme form in recent years. Few people wanted to buy in early 2020, during coronavirus, and last year, when everybody else use fearful.
Most want to buy when others are greedy and optimistic, such as late 2020 and 2021.
The founder of Vanguard said that net purchases of ETFs and funds was highest for the firm during 1999, after an 18-year bull market.
When were sales highest? You guessed it, 2008!
Not all of those sales was due to people needing the money. Most was panic.
How can outsiders become game changers?
I am sure most people over the age of 30-35 has heard about the video game Goldeneye.
It wasn’t the most widely sold video game in the world, but it was arguably the most influential.
I was never a huge gamer as a kid, but I can remember how much excitement there was about this game.
On a plane journey a week ago I watched an interesting video about the people behind the game.
It was started by a video game company called Rare.
The developers lived in a cottage in the UK countryside, and many of them were outsiders who hadn’t succeeded before.
They were in their own world, mainly free from the judgements of other people, and plenty of them were outsiders from the wider culture as “geeks” in the 1990s.
I remember once listening to the Brewdog founder James Watt saying that being a loner has, on average, been a great benefit to him in business, as he didn’t listen to the naysayers.
Many insiders are more likely to get influenced by others, and talked out of good career and business moves.
We also have to remember that quite a high percentage of successful, self-made, businesspeople are dyslexic or autistic.
That includes people like Richard Branson, Walt Disney, Henry Ford and Spencer Kelly.
The how is the tricky part though. Becoming an expert in your area, being stubborn in some ways but still open and not listening to naysayers is a good start.
Being an outsider and not good at what you do is pointless.
How can one avoid a modern-day Ponzi scheme or an investment scam?
People who regularly watch Netflix have probably seen the Bernie Madoff documentary which is currently airing.
It spoke about how there were many skeptics, and red flags, but nobody wanted to know.
It is really quite simple when dealing with an investment advisory company.
An investment advisory company shouldn’t ever hold money for stock market assets personally.
There should be no reason why you should need to send money to an advisory company bank account directly, when third-party banks, platforms and insurance companies onboard advisors.
Assuming that you are invested in “regular”, publicly-listed, assets, on third-party platforms, you will be OK.
Investing in private assets, “Shark Tank or Dragons Den style”, gets more tricky.
These assets aren’t listed on public exchanges, unlike corporate bonds, stocks and ETFs.
Therefore, you do have to be more careful.
If a wealthy investor gives money to a start-up founder, and they misuse the money, then it isn’t easy to recover the money without spending too much on legal fees.
The same applies to crypto. I am not the biggest fan of most regulations, but it is true that some of the sensible checks and balances that exist in the traditional financial arena, don’t always occur with crypto exchanges.
A bank, insurance company or investment platform can’t easily just “run away” with your money, or do what FTX did.
Therefore, even some advocates of crypto, which I am not, tend to hold it “cold storage” for this reason.
Fortunately, the number of Ponzi schemes is tiny, probably less than 0.1% of the total money sent globally, but that doesn’t mean you should send money to advisory firms directly.
Beyond that, investors need to consider how much risk they want to take. If somebody makes a high-risk investment like private equity which goes to zero, that isn’t a scam if the investment just didn’t perform well.
So, doing basic due diligence and making sure you invest into something which is in line with how much risk you want to take, helps.
How did Elon Musk make billions of dollars suddenly out of thin air?
It wasn’t out of thin air – he created companies that gained in value.
So, he didn’t “make” in terms of income, over a hundred billion.
The paper value of his companies was quoted as that, based on the listed stock market price.
As he didn’t sell 100% of his shares when the price was that high, he didn’t “make” that money.
If you buy a house for 500k and it is now worth 700k, have you “made” 200k, even if you haven’t sold?
Clearly it isn’t the same thing.
Ironically, the Guardian, which has been championing a wealth tax on unrealized wealth, printed a story a few days ago:
“Elon Musk breaks world record for largest loss of personal fortune in history”Elon Musk breaks world record for largest loss of personal fortune in historyThe tech billionaire has reportedly lost $182bn (£150bn) since November 2021, largely due to the drop in Tesla’s share pricehttps://www.theguardian.com/technology/2023/jan/12/elon-musk-breaks-world-record-for-largest-loss-of-personal-fortune-in-history
Again, he hasn’t lost money. The quoted values of his company have fallen by a lot.
I think this is one reason why people think billionaires pay very little tax, which is a misconception.
Fluctuating wealth isn’t a loss or gain – a decline or a gain isn’t a loss or a profit.
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Adam is an internationally recognised author on financial matters, with over 669.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.