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
- 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.
- 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?
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Why do most businesses fail?
Let me give you a recent example to illustrate a wider point. You might have heard the news about the ill-fated idea of a European Super League:
A small handful of clubs wanted to create an NBA style league. Why? Money of course.
Yet the amount of money going into football is bigger than ever, at least before Covd-19 affected the business model.
Some clubs were earning as much as $1billion before the pandemic:
That is miles more than in the 1970s, 1980s, 1990s and 2000s even adjusted for inflation.
So, why are many clubs broke? Is it the pandemic? No, because even though revenues have fallen, they are still higher than before.
The reason is simple. Cashflow. More money has come into football, and more money has come out due to players wages and transfer fees.
Almost like a juicer. More goes in, more comes out:
A few players, managers and agents have become rich, but the clubs haven’t.
You might say that football isn’t a “normal business”. That is true. Yet I have seen the same issues in regular businesses.
In traditional businesses, more money comes in, and more is spent on offices and staff.
Online businesses make it easier to scale revenue more than expenditure.
Remember though, the that doesn’t mean making money with an online business is easy.
If it was, everybody would do it. It is just easier than from a traditional business.
What is more important for retirement today — making good decisions (as in saving money or not having kids) or having good luck (as in getting/keeping a high paying job and/or working in a booming economy for most of your adult life)?
I was reading a Vanguard study a few years ago which looked at correlations between people’s retirement accounts.
They looked at the following variables
- Total percentage returns
- How good the markets performed
- Amount of inheritance received
- Where the person lives.
- Perceived investment knowledge
- If they have a lot of financial experience
- How the economy is performing
- Asset allocation
- How much you invested and for how long
Which were the biggest indications of retirement success do you think?
Well, how much you invested and for how long. Sounds so simple. And it is.
Ultimately, getting good returns is ideal. Yet it is difficult to beat the person who has invested hard for say 45 years.
Many people worry about things like stock market crashes, and other events they can’t control.
Yet the key to investing, and indeed retirement, success is often keeping it simple.
Therefore, the decisions people make is key. The decision to invest early, or the decision not to try to time the stock markets.
It is true that these decisions can be influenced by things like the economy.
If the economy is booming, it is easier for a greater number of people to invest for longer, as an example.
But I have noticed that people who control their emotions are the most likely to succeed in investing.
The ability to control emotions is more important than even investing knowledge.
I even know people who consider themselves financial professionals who get too emotional when investing.
We saw that last year. Sensible people kept investing despite job insecurity.
Emotional investors had a “wait and see approach” and blamed job insecurity for not investing.
Fast-forward one year and some markets have close to doubled compared to the lows of March 2020, and the worries now are about the economy being so strong that it will overheat!
The same people worried about a Great Depression a year ago are now worried about inflation due to an incredibly strong economy. The irony.
Many people say “nobody cares about your money more than you do”. That’s true in many ways, even though plenty of people waste money.
Yet caring too much can be as bad as caring too little, as those who overthink tend to not even invest to begin with.
What’s worse, many people worry about things that they can’t influence like future tax rules or whether the stock market will do better (or worse) than historical averages.
Not overthinking the retirement process and only trying to control what can be controlled, is key.
It depends on your individual situation of course. If you have more money than you need to retire, it makes sense to take some risk of the table.
For example, invest in a 60%-40% portfolio. 60% in stocks and 40% in bonds.
Such a portfolio won’t perform that well, long-term, compared to being 100% in stocks.
Yet even in extreme periods, it won’t fall much because bonds are less volatile than stocks and aren’t correlated
Therefore, if you buy and hold for 5 years +, your chances of being down are slim:
What’s more, you can withdraw 4% of the portfolio every year, without running out of money.
However, let’s say you haven’t invested enough for retirement. In which case you have to either take a bigger risk, for example by being 80%+ in stocks, or taking a more radical decision.
An example of such decisions are
- Downsizing your house
- Selling some of your possessions if applicable.
- Moving to a cheaper place in your home country
- Making lifestyle sacrifices if you don’t want to move
- Work part-time for a few years in retirement.
Doing that will make the figures work for more people.
Let’s separate this answer into various points:
- Individual stocks vs the general market
- Rational and irrational reasons
When it comes to individual stocks, it is true that mania can take off. Take the Qualcomm stock in 1999…..up 2,600%!
Now perhaps that isn’t the best example. Qualcomm survived. In fact, it is now trading higher than in 1999.
These stocks either didn’t survive or got taken over:
Yet anybody who bought Microsoft, Apple or tones of other stocks in 1999, are now sitting on a great profit .
You might say that few, or any, can consistently predict which stocks will soar and which will go the way of Lehman Brothers.
That is true, but that is why people buy the index itself. It wasn’t irrational to buy the S&P500, Nasdaq or MSCI World in 1999 or 2000.
Historically, over 200+ years, markets have always came back, and there is a lot of academic evidence that nobody can consistently time the stock market.
As the stock market has always gone up over the decades and centuries, but sometimes crashes (and those crashes are unpredicable), it is better to just invest through rain and shine.
In other words, just invest monthly, regardless of whether stocks are at records, down or stagnant.
You have to remember that stocks hitting a record high is very common. Look at the number of times the S&P500 has hit records.
Therefore, anybody buying the whole stock market, even at record values, is just making a rational decision.
That is assuming they hold it long-term.
Problems come when people:
- Buy at records and then panic if markets falls
- Try to time the best moment to get into the markets. They either fail the first time, or succeed. If they succeed, they assume it is their skill and not luck. Eventually they fail. Others wait for markets “to fall more people I get in”, and never get in. You saw that last year. The Dow briefly touched 17,000 and many people waited for markets to fall lower. It never did.
- Watch the news too much and let that influence investment decisions.
- Trade on emotions like greed, fear etc.
- Don’t focus on the long-term.
- Speculate in general rather than invest.
It actually isn’t. A hedge usually means that the asset is almost for sure going to rise when inflation happens.
For example, inflation-linked bonds. With real estate, there actually isn’t a strong correlation between inflation and rising prices.
In the UK, housing price growth was weak between 1900–1960, despite high inflation in the post-war period.
The highest periods of rising, real terms, prices was in the 1992–2008 period.
The same thing happened in the US. Yet inflation in the 1990s and 2000s was quite low – much lower than the 1970s and 1980s.
It is true that rents can go up during inflationary periods. It is also true that real estate tends to go up in nominal terms during high-inflation periods.
What isn’t true is that real estate will always beat inflation during inflationary periods. It only captures a certain percentage of the inflation.
What seems to impact real estate prices more is:
- The supply and demand fundamentals
- How the economy is doing seems to have a bigger effect at least on residential prices than the stock market
- Interest rates
- Sometimes government policies around stimulating the market through tax incentives.
- How much the asset actually produces in terms of yield and leveraged returns can matter more than capital values.
The aforementioned supply and demand issue is currently affecting real estate markets.
Commercial real estate, like offices, is being affected. There is less demand.
People have learned that they can work from home. As more people are working from home, some people want to upgrade.
This could be to give themselves more space, like a home office:
It is affordable for more people as commuting and office related costs (like lunches) have fallen.
If this trend continues, the rise in some forms of residential real estate, and the fall of commercial property, won’t be due to inflation.
Pained by financial indecision? Want to invest with Adam?
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 I spoke about the following issues and subjects:
- Do I personally know people who lost everything in the 2008-2009 financial crisis? What lessons can be learned about risk taking, greed and leverage?
- Why does Malaysia fail to attract as many expats as Thailand?
- Is it true that many wealthy people drive cheap cars? If so, why do many wealthy people prefer cheaper vehicles?
- What habits and hobbies changed my life the most, and what did I learn from this?
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