We are coming towards the end of the year. It has been a great year for stock markets.
The S&P500 is up close to 20%, with the Nasdaq doing over 30% so far this year.
Yet most people haven’t gotten excellent returns, primarily because they panic sold during the worst of the crisis in late February, March and April.
Others sold before the US election in 2020, not remembering the lesson from 2016, when US and global makers unexpected soared after Trump’s election.
In this article, I will list some of my most popular Quora answers down the years, including some of those written during the worst of the crisis.
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.
There are a number of reasons. Firstly, it just isn’t true, unfortunately, that “most people” know that the markets will eventually perform better.
Many people don’t know basic facts like:
- Most major stock markets, especially American ones, have outperformed all other investments long-term. That includes bonds, cash, gold, commodities and property.
- How often markets hit record highs. Sometimes they hit records highs as much as 30–80 times a year. Take the S&P500 as an example – Closing milestones of the S&P 500 – Wikipedia. Now sure, there are various periods where stocks can take 1, 3, 5 or even over 10 years to recover. But markets have been hitting record highs for over 200 years. The Dow has been hitting record highs since it started in 1896, and so did Stock Markets which existed before then.
- Many people believe they can beat the market by market timing, when the evidence suggests less than 0.1% of people manage this long-term.
- The dead outperform the living in investing, including most of the living who consider themselves professionals. The reason is simple enough. They don’t have emotions like greed, fear, over-confidence etc. They buy and hold by definition. How about when it comes to the living – who does the best? PHDs in portfolio theory? No. How about people working at banks? No. Or millionaires? No. The answer is people who never login to their investment accounts, either because they have forgotten about it or they are relaxed.
Apart from that you have the following facts
- Countless people don’t understand the difference between a loss and a decline. If markets fall 50% next year, you haven’t lost any money unless you sell.
- Emotions. Fear is a far bigger, and stronger, emotion than greed. You will therefore notice a trend. Even though markets go up big time long-term, the falls are big and fast. Most major stock markets fell 20%-25% in a very short period of time in late 2018/early 2019. They fell much harder this year. This is called “loss aversion”. Look at Quora. Whenever markets hit record highs, there are few questions on here. There are more questions about people panicking (fear) about a crash. Whenever there is a huge crash, questions increase 10x!
3. The media. Whatever bleeds, leads. The media always leads with fear-mongering headlines. This of course exists beyond money. The media are more likely to report on negative news, than positive news. So whenever markets crash, it is usually the number 1 news headline. When markets hit record highs, it is barely mentioned.
4. People don’t understand that falling, or stagnating markets, bring about an opportunity. I mentioned in this answer how somebody could have made a great profit investing during the Great Depression – even if they had invested a big lump sum at the peak in 1929! Adam Fayed’s answer to How should I invest my money during the coronavirus crisis?. Rationally speaking, people should want markets to go down in their 20s, 30s and 40s, and spike higher before retirement. One of the best podcasts I watched was with a guy who became a multi-millionaire by tracking the markets from age 18 until 45. He mentioned how he would, quote,. “be dancing in the streets if markets crashed tomorrow”. That is logical, but emotions often act differently. This is especially the case when you consider that the media always say “this time is different”. They say that in every single market crash, and will do during every single one in the future I am sure!
5. There isn’t a sound understanding about how bonds and stocks, asset allocation, can reduce your risks. So if stocks fall, and short-term bonds rise, this is a great rebalancing opportunity.
In March-May, some of the major DIY firms reported that up to 35% of people over 65 panic sold.
There can be no rational reason for that. Most of the people who sold were retired, or close to retirement, at that age. So it was just blind fear.
Vanguard reported the same thing. Net inflows into Vanguard funds were highest during 1999, at the end of 18 years of strong stock market performance.
They were at their lowest in 2008–2009. I am sure a percentage of those people lost their jobs and needed to sell, but many of the orders came in days after Lehman Brothers went bust.
So it was mainly due to emotions. A so-so investor that can control their emotions, will beat an PHD in portfolio theory, if he/she can’t control their emotions during the highs and lows of the market.
The following expressions will save you a fortune and reduce your anxiety long-term.
I will paraphrase:
- Wall Street has predicted 20 of the last 3 recessions and crashes
- Put 1,000 economists in the room and you will get 1,000 different answers
- Market timing doesn’t work. Stay the course
This quote sums it up:
- Invest every month, regardless of whether markets are going up or down, into stock and bond indexes
- Raise your bond indexes as you age
- Reinvest your dividends
- Never get too excited when markets rise or too depressed when they fall
- Take the financial media with a pinch of salt or switch It off entirely
Just look at Trump and Brexit. “Everybody” was so worried in 2016.
Look at China and the trade war in 2018–2019. All the while markets quietly hit new record highs, as they always do long-term.
Fear is profitable for the media but not the average investor.
Yes because I invest every month through rain and shine. I invested in January, February, March, April, May, June and will do in July too.
There is no safer strategy than to buy in every month, into both bond and stock funds, “forever”. By forever, I literally mean forever.
There is no need to panic when markets are down, or get too excited when they are up.
It is just the natural course of things and unless you panic sell, it doesn’t mean you are losing when markets are down.
In fact I am disappointed by the improvements in market fortunes.
I was hoping for the markets to stay low for years to buy at cheaper prices but I can’t control that.
The mistake people make is panicking as fear is a bigger emotion than greed.
Just look at the scenes we saw in life:
And in the stock markets.
The ability to regulate your emotions is more important than technical knowledge in investing.
Even if the markets hadn’t recovered so quickly in regards to the S&P500, Dow and Nasdaq, it wouldn’t be an issue.
In fact it would have been a great opportunity if markets had stayed low for years.
I have met even countless “professionals” that panic.
Do people really benefit when they panic and sell their stocks for gold, or real estate, etc.? A presentation I saw once showed how useless it is to try and time the market. Do these folks generally do worse?
Of course people like that always do worse. The key is in the word…panic.
Panic by definition is about emotions and not rationality. So panic selling isn’t about looking at the facts.
It is about running for the exist!
And this results in returns like this:
US Markets were at 1,000–2,000 barely 25–30 years ago. How do people lose money when markets have gone up by 10–14x in one generation?
They are buying high (1999) and selling low (2008). Or maybe they aren’t losing money, but as per the statistics above, they aren’t doing well relative to the market.
So it is always best to:
- Stay calm
- Invest every month regardless of the headlines and whether markets are up or down
- Rebalance yearly
Also be diversified but not overly so. It doesn’t make sense Tobe 10% in gold, 10% in bonds and 80% in 20 different markets!
It does make sense, however, to have some bonds and stock indexes in the same portfolio.
Below is Jeff Bezos speaking at TedTalks in 2003:
The Nasdaq had fallen about 76% since its 1999 height – even bigger than the S&P500 or Dow Jones after 2000.
Many people were predicting that the internet was a fad, including some prominent economists:
What did Bezos say at the talk? The dot-com bust wasn’t like the gold rush it was more like the early days of the electric industry.
Why do I make this point, when your question isn’t about tech specifically?
The reasons are simple and twofold:
- What has been the best performing US Stock Market in the last 30 years? The Nasdaq. If you would have bought and held the Nasdaq from 1995 until today, you would have been about 12% per year if you had reinvested the dividends despite two huge falls in 2000 and 2008. If you would have invested more in 2000–2002 and 2008–20011, you would have made more. So there is no need to fear volatility. That doesn’t mean trying to time markets, merely there is no need to fear big falls or rises, unless:
a). You panic
b). Have 0% in government bonds. You do need a mixed portfolio.
c). Are close to retirement
2. Never, ever, be taken in by somebody that says “life will never be the same again”, or “this time is different”. The dot com bust was painful for any investor that sold during the bottom, but life got back to normal.
So the key things are:
- Never speculate. Don’t buy stocks on Monday to sell on Tuesday. Now sure, you can “win” doing that short-term. A far better way is to buy and hold for decades, in stocks AND bonds.
- When stocks are going up relative to bonds (like most years) rebalance towards bonds. When bonds are doing better than any other investment (like these days for obvious reasons), rebalance back.
- Now is always the best time to buy stocks if you are long-term. Regardless of whether you buy tomorrow, in 2 weeks or 2 years, markets will rise long-term. So don’t worry about whether you buy the Dow at 20,000 or 30,000. Look at any long-term graph of the markets. Somebody that bought the Dow at 1,000, 800 or 1,500 30 years ago, wouldn’t give a damn now
- Always reinvest dividends.
- There will always be boom times and downtimes. Nobody can predict when these times will occur. Nobody in my network (including investment professionals) predicted that markets would do well straight after Trump got elected. Nobody I knew predicted that markets would go up 30% last year. Nobody I know predicted that some stock markets would hit records barely 2–3 weeks ago, despite news of the virus, only to fall back hard.
- I know PHDs in finance. Financial experts and clueless people. Yet I have never met even one person that can beat markets by timing LONG-term. Plenty get short-term wins.
- A virus or terrorist attack (9/11 and the like) won’t affect market profitability long-term. Will some individual firms like airlines go bust? Maybe but that is beyond the point if you are invested in the whole market in a diversified portfolio.
The reality is the fundamentals of investing don’t change as much as people think. Some things do change, but many things stay the same.
In fact, 2020 has shown, once again, that some of those fundamentals are in tact.
For years people were suggesting that government bonds are now pointless because they pay less than before.
Then March 2020 came along, and short-term government bonds outperformed all other asset classes during the worst of the crisis.
That gave people a chance to rebalance. So, whilst the S&P500 has done about 5% this year, people that rebalanced their portfolios could have gotten much more.
Therefore, keep to the fundamentals, which are
- Be long-term
- Be in both stocks and bonds “forever”
- Rebalance from one asset class to the other
- Don’t panic during market crashes
- Don’t get too excited during the boom times
- Switch off the news media. Numbers 4 and 5 are much more difficult to do if you are always consuming sensationalist stuff.
- Don’t be emotional about money and investing
- Never confuse a decline with a loss
- Be exceptionally sceptical of anybody who says this time is different. They say that during every crash, or indeed bull market
- Be an investor and not a speculator
- Have your investment portfolio aligned to your age. So when you are younger, be more focused on stock indexes. As you approach middle age, bonds become progressively more important
- Reinvest dividends
The only thing that the crisis has changed, perhaps, is interest rates for the next decade.
Interest rates have been close to 0% for over 12 years. They were briefly rising, especially in the US, in 2018–2019.
Now they look like they will stay low for 5 years+. Therefore, the long-term difference between saving and investing money will only grow.
Saving has never beaten investing long-term, but historically, the banks have paid above inflation.
These days, in comparison, people will need to take a direct loss to inflation if they save money.
Graphs like this used to show the difference between saving and investing long-term:
In the future graphs like these could become even more extreme, if the US, EU and UK have 20-30 years of 0% interest rates like Japan has gone through,
Not the virus itself, but the way policymakers (rightly or wrongly) decided to handle it.
During the deadly 1918–1920 Spanish Flu epidemic, markets went up on average, even though 1920 was a bad year for stock markets.
There was also a world war happening during that period! But there were some key differences:
- The government in most countries didn’t shut down businesses and large sections of the economy. This has never happened in peacetime, globally.
- The media wasn’t as big then. No 24/7 a day news with updates on the dead!
So the markets were more reacting to the uncertainty and also the speculation that the virus would indirectly lead to a recession due to the governments handling of the crisis.
It comes with the territory though, in the same way the recent huge rises have as well in the last 2 days.
Markets go up and down, but will more than recover long-term. There will be volatility in the weeks and months ahead.
Trading that volatility makes no sense. Nobody can predict if the bottom has been hit.
Just be thankful for lower valuations for a few months or years. It always you to collect units at cheaper prices.
I hope markets go down further even though I wouldn’t bet on it, and would never try to time markets.
That is for two simple reasons; I am a net buyer of units as I am not in retirement and I own stock and bond indexes.
So if markets go down, I am just buying at cheaper prices, and can rebalance from bonds to stocks.
There is no reason to fear falls or rises, if you are long-term and diversified enough.
Best to just switch off the worst sections of the media. I did that ages ago.
Far better for our wallet and mental health.
Remember before 2016. People wondered what would happen if Trump got elected?
Even most of his supporters expected falling markets, at least for a few months or years.
Then this happened:
Not necessarily a reflection on Trump, in the same way that Bush can’t really be blamed for the weaker stock performance in the 2000s.
Markets go up long-term, under most presidents. And let’s not forget it is virtually impossible to tell when there is no correlation (or weak correlation) between:
- Markets and presidential decisions, long-term at least
- Stocks and geopolitical problems
- Stock markets and interest rates
- Stock markets and length of boom years
- Stocks and recessions, long-term in particular
- Stocks and government shutdowns
- Stocks and general growth – just look at how bad China’s market has performed.
Also, look at recent years. Stocks have performed well during:
- The Korean nuclear standoff
- Trump’s election
- Trump and the trade war
- The government shutdown
Markets have also performed badly during periods of geopolitical calm.
There is a correlation between stock markets and P/E ratios, and various other ratios, but it is weaker than most people think.
The P/E ratios aren’t overvalued right time:
Currently the S&P is at about 20.03. It is miles away from 1999. Just focus on the long-term.
Far easier to get rich slow.
People should have learned from last time. Who saw the above coming?
Markets were up, barely 24 hours, after Trump’s election, and subsequently went up a lot.
That doesn’t mean Trump’s policies are good or bad. Indeed, the average stock market performance under his reign is still raging Clinton’s, Obama’s and even Ford’s;
The point is, markets usually go up over time. Occasionally they go down.
They go up, and down, for 1001 reasons. Many reasons have nothing to do with politics.
So blaming, or praising, a president for stock market performance isn’t wise, nor is trying to predict the future direction of the market.
Too many DIY investors worry about these things.