What’s a smart investment when the Fed raises interest rates?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 397.7million views in recent years.

In the answers below I focused on the following topics and issues:

  • What’s a smart investment when the Fed raises interest rates?
  • What attributes do high-net-worth individuals seek in a financial advisor?
  • If you just inherited 253k, how would you invest it?

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Source for all answers – Adam Fayed’s Quora page.

What’s a smart investment when the Fed raises interest rates?

I remember the last time inflation spiked, in 2010-2011, plenty of people got their fingers burned to invest in commodities and gold.

You can see the underlying mood, at that time, below:https://www.businessinsider.com/standard-chartered-5000-dollar-gold-2011-6 https://www.reuters.com/article/us-commodities-idUSTRE6A42S820101105 

Just a few years previously, in 2007, plenty of people reacted to the $146 gold price, by predicting it would hit $250:Crude oil at $250 per barrel?Forecasting future price of oil is hazardous.https://economictimes.indiatimes.com/crude-oil-at-250-per-barrel/articleshow/3247243.cms?from=mdr 

The inflation this time is different as it is connected to the supply chain issues caused by the pandemics and lockdowns, but what I do know is this:

1. Just like in 2007, 2010 and 2011, many people will buy commodities and gold at a high level and regret

2. As in 2000-2002, 2008, 2020 and every other time markets have fallen by 20% or more, people will panic sell and regret it

3. No long-term investor will lose money by staying calm In 20-30-years time, the long-term investors performance will not be affected at all by what is happening in 2022, just as the 2022 stock market values isn’t linked to what was in the news in 1993.

4. Cash is a guaranteed loss to inflation

5. The keys to long-term success are time diversification (being in assets for a long-term) and asset diversification (not putting all your eggs in one basket), unless you want to take much more risk. Putting it crudely, the longer you are in assets like the stock market, and the more (sensible) assets you are in, means the less likely you are to not lose money.

6. The less you analyse once you invest, the more you will make. According to various studies, the investment accounts of dead people outperform the living – even knowledgable people in investing. The reason is simple – markets rise over time and dead people don’t have emotions so can’t panic sell after watching some fearmongering news article.

So, don’t focus on what will be your return in 2022, or even 2023. Just have a good long-term plan, and stick to it.

Stocks had a lost decade from 2000-2010, just like in 65-82, but that didn’t stop the long-term investor making money.

London real estate has had plenty of lost decades too in the last hundred years. That doesn’t mean that it wasn’t sensible to own just because of short or even medium-term performance.

One thing that will get affected by rising interest rates and inflation is margin trading. Plenty of people, including many high-net-worth individuals, have been used to getting money lent to them at low levels of interest rates via lombard loans and other loans.

Just in the same way that mortgages, and the associated debt/leverage, can improve a property’s performance, so can margin, even though it is risky.

If you can get money for 1%-2%, and invest it into very low-risk assets, you are making money from doing little and not taking huge risks.

That will change if interest rates and inflation rise, which means fewer people will take such options or will need to get higher returns on the investments to justify the loans. Anyway, I digress.

So, in summary, be proactive when setting up a sensible diversified investment account but then learn from the best investors of all…….the dead……and also be careful with leverage.

What attributes do high-net-worth individuals seek in a financial advisor?

I will speak about four of the main attributes that people should focus on.

  1. Diversification.

If you are young and don’t have much money, then growing your wealth should be the most important thing.

In comparison, if you have just sold your business or are already worth a lot of money, then preserving wealth, adjusted for inflation, should be the number one factor.

It is possible to beat the stock market with a private business for a long time. As a business gets bigger, the returns and growth can diminish, and many people want to give up or take it easy as they get older.

Therefore, getting the highest possible return shouldn’t be the aim. The aim should be to get the highest possible return adjusted for risk.

2. Specialization

If you are a local and don’t have plans to move overseas, then a local advisor specializing in high-net-worth individuals might be enough.

There are exceptions to this, especially if you can’t get access to the right assets locally, due to regulation or another reason, or just really trust a particular advisor due to enhanced knowledge or another reason.

If you are an expat, or have a very specific situation, then it is best to deal with a specialized player. I have run out of the number of clients who have told me that advisors locally can’t accept them once they mention they will move overseas.

2. Great service levels

In general, you will get superior service at a boutique restaurant or hotel than at a 5-star chain. To them, you are just client number 101,222 in many cases.

When it comes to lawyers, tax experts, and advisors, this is, even more, the case. The top banks will usually give you a very vanilla experience, and focus on the brand name.

What’s more, they will often focus on their own fund ranges – HSBC bank will focus on HSBC asset management funds for obvious reasons.

This is a conflict of interest if the banks have their own funds and are holding the money. It is better to focus on more boutique, yet specialized, firms, that don’t have their own investment funds.

4. Exclusive investment options

This is a bonus. If an advisor has some exclusive investment options, or some which at least aren’t easy for you to gain access to yourself, this can only be a benefit.

I explain more in this video:

In reality, most high-net-worth individuals know these things already. The one exception is the service levels.

Typically, most wealthier people first hire a bank, but then subsequently realize they are customer number 10,202 unless they are a multi-billionaire.

I just inherited $253,000. What’s the best way to invest it?

Judging by your answer, I can’t know the following things:

  • Where you live
  • Your circumstances
  • Your income and if you need this money to fund your lifestyle or not
  • Are you an expat or local
  • Your current age and other things about your circumstances
  • How much risk do you want to take.

A good financial plan is bespoke to your circumstances – not what the latest news headlines show.

The biggest reasons people fail in investing are analyzing and watching fear-mongering news too much, getting emotional, and also taking random advice from friends.

People who succeed in investing tend to do the following things:

  1. Control their emotions. So many people buy high and sell low due to fear. We have seen that this year, and with Cathie Wood’s fund as per the video below. Linked to this is the concept of “doing your research”, which for most people just means buying if the price is going higher, or another emotional impulse.

2. Focus on the long-term. A long-term plan shouldn’t be affected by stocks rising or falling, by 20%.

3. Diversify both in terms of time diversification, as it is safer as per the charts below, and asset diversification – not putting all your eggs in one basket. The last point is especially the case for middle-aged and older investors.

4. Take advice where needed. This could be to do with tax, investing, or other issues. The more complicated your situation, the greater chance that advice will add some benefits.

5. Don’t try to time the perfect time to buy assets, also known as market timing, which doesn’t work.

And finally, they don’t stay in cash. Cash is a 100% guaranteed inflation loss. What’s more, this year, inflation is due to top 10% in the UK according to the Bank of England’s forecasts, with banks paying 1%. That is a 9% loss to inflation.

If you buy assets, they will go up and down, but even if they go down, you don’t face a loss (only a decline) unless you sell out.

Nobody “lost” money investing one day before the stock and real estate crash in 2007-2008, if they kept their nerve. Prices recovered within 3 years.

In comparison, cash lost to inflation can never be recovered.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 492.2 million answers views on Quora.com and a widely sold book on Amazon

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