I often write on Quora.com, where I am the most viewed writer on financial matters, with over 256.9 million views in recent years.
In the answers below I focused on the following topics and issues
- Will the tech bubble burst in 2021? Or perhaps it is the wrong question and there isn’t a bubble to begin with?
- Is the widening gap between rich and poor for political reasons? I explain why changes in the world economy, such as the opening up of China and the former Soviet countries, alongside technological developments, is a bigger reason for this gap than politics.
- Is $1m enough to retire if you are young? I look at all the variables you should consider before retiring on a given amount of money.
- Why do people worry when stock markets are crashing? Is it fear and other emotions, lack of knowledge or something else? I examine the many, often complex, reasons people panic sell during these extreme moments.
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A few days ago, Warren Buffett said that he doesn’t think that many tech stocks, like Apple, are overvalued.
in fact, with interest rates being 0%, he thinks stocks look cheap.
Not all stocks, but many. This surprised many people as he is seen as a value investor who doesn’t always go for growth stocks.
Personally, I don’t think there is a bubble in the entire market. There could be a bubble in some individual stocks though.
The reasons are simple enough to understand
- The Nasdaq went up about 44% last year but we are using more than 44% more tech!
- Sometimes people are too keen to call a bubble. In 2000, 2005 and 2010, most people thought the Nasdaq was in a bubble. Yet somebody who bought and held the Nasdaq for 21 years would have made a lot. The general trend was always towards using more tech. Likewise, I remember in the 1990s and 2000s, many people thought football/soccer was in a price bubble with inflated salaries and that has proved not to be the case. The point is, just because something is going up a lot, it doesn’t automatically mean there is a bubble. It can do, but it depends on the circumstances.
- Even once the pandemic ends, I don’t think we will go back to “normal”, as we were using more technology even before the crisis
- For technology firms, they reinvest sales into the business. Amazon looked very overvalued for years, maybe even a decade. Few think Amazon is now overvalued, but the point is that traditional ways to value a business don’t always apply.
- Interest rates are low. Whilst they remain this low, money will go into the stock market.
- Other trends are helping technology firms too, such as the move to more of a green focus. The number of people who prefer to use Zoom rather than fly will only increase. Now sure, there are other trends which are negative, such as more technology-based regulation, but the positives outweigh the negatives for tech long-term.
- A lot of other assets, like real estate, look riskier than historically has been the case. Together with low interest rates, this could push more people in markets, and a certain percentage will go into tech.
That doesn’t mean you should be 100% in tech. European, emerging markets and plenty of other stock markets look very cheap now.
It also took the Nasdaq about 14 years to recover from the 2000 peak.
That was great for the long-term, patient investor, but most people lost confidence in that period.
Only a select few kept investing and now have reaped the rewards of those low valuations.
So, I have no doubt that if the Nasdaq does fall big in 2021, many will panic, and only a select few will stay the course.
These two events changed the world. First, formerly communist countries opening up the economy (if not politics).
This happened in the 1974–1988 period, most famously with China under Deng’s leadership:
Then the Berlin Wall fell, and more countries opened up:
The world became richer, and we started to use technology more. All of these events changed the world.
Take sports. The best player in the world in 1970, like Pele, couldn’t move to Qatar, China or the UAE.
He could move to the US:
Now players can move everywhere and even sell to a hugely bigger population on their own personal website and get paid $1m per promotion on Instagram like Ronaldo.
So, it isn’t a conspiracy. The world has just changed. Politics has played its part as more countries have opened up and ditched old ideas.
But it isn’t orchestrated. To the contrary, politicians are more likely to make “the rich” scrap goats.
We also need to remember that the very richest people historically were richer than the Bezos’ and Gates’.
The richest people today are worth $200billion or so. In the era of Rocker fella, Ford et al, a small number of men had $200blllion-$450billion in wealth adjusted to today’s prices.
This chart was from a few years ago, but you can see how large historical wealth was:
Now with the updated inflation figures Rockefeller would have over $400 billion in today’s money.
He was worth more than Gates and Buffett combined and almost as much as Buffett, Gates and Musk combined!
All that as well in a much poorer world than we live in today. He was worth $450 billion adjusted for inflation during a time when the average salary (even adjusted for today’s prices) was about $1,000-$2,000 a year!
The only historical comparison could be this.
Imagine if in 2022 or 2023 there is a new billionaire who is worth $450-500 billion.
But they don’t live in a developed country and instead live in some countries with GDP per capita or $1000 or so.
Places like Laos, Cambodia and many others
Only that would begin to compare to how big the gap was both in terms of income and wealth over a hundred years ago.
People forget these facts due to the media and not adjusting historical wealth for inflation.
It is true that inequality has been steadily rising (even adjusted for inflation) since 1945, and we could one day soon see the first trillionaire in the world, but we aren’t yet back to the rates of inequality we once knew.
It depends on the following factors:
- How old you are
- Your cost of living which is linked to your tastes and where you live
- What you invest in
- Sometimes your health condition if you live in a country which doesn’t have free medical care at the point of use.
If you are very old, and well past the age of retirement, then $1m is usually enough.
If you are young or even 65, then $1m isn’t enough in most developed countries if it is just in the bank.
You could live for 35 years. Interest rates are 1%-3% below inflation now. The base will erode.
Assuming your assets are in stocks and bonds, the academic evidence shows you can take out between 3.5%-5.5%.
The most basic rule is the 4% rule of retirement. The creator of that rule has done a lot of work recently to make clear that 4% is very conservative.
Nevertheless, it is better to be conservative if you retire young.
So many things can go wrong such as:
- Bad health
- An unexpected tax bill
- Needing to support parents in retirement
- You could make a mistake too like panic if the market goes down.
- If you are investing 100% in illiquid assets like property in retirement, which isn’t sensible to begin with, you might not be able to find tenants for months.
So, let’s assume you decide to be conservative and go for a 4% withdrawal rate rather than say 5%.
Therefore, $1m = $40,000 in inflation adjusted income for life, if you follow this rule.
If you can live comfortably where you are for that amount of money, then you can retire now.
Alternatively, if you can’t afford to retire on that where you live, consider emigrating or moving to a cheaper place in your home country.
I have run out of the number of people who I have met overseas who wanted some adventure, and couldn’t afford to retire young back home.
If you want to semi-retire, or you can find another way of making income apart from owning assets, then you don’t even need $1m.
That doesn’t work for everybody though.
There are roughly eight types of people when it comes to market crashes.
Some of these people worry. Others don’t at all, with some being somewhere in the middle.
- People who never buy financial assets. Often this is due to misconceptions like stock markets are risky or are about to crash.
- Those who celebrate the fact that the stock market has crashed for the reason you allude to but they wait until it crashes more. For example, in 2020, the Dow went from 29k to 17k (it is now at 34k). When it was at 17k-18k, many of these people wanted to wait until it hit 15k. It never did. If it did hit 15k, I guess some would have waited for 13k!
- People who celebrate markets crashing and unlike the last group of people, they do in fact get in. Sometimes this group of people get lucky. They therefore think it was all down to skill. They try to time the markets in the future and it eventually doesn’t work out.
- Then there are those people who claim that they will “never” be the ones who will panic sell during a crash. Then they panic sell themselves! Usually it is due to the fear that exists at that time. The media typically are screaming that “this time is different”, and some people believe it. Covid proved that even people who usually don’t panic sell, can panic in extreme situations. A study from one of the leading do it yourself (DIY) brokers showed that between February and May, 35% of the over 65s completely sold out their positions! I am sure plenty of others sold of part of their portfolios as well, and some of them have never panicked before. The main reason is probably the idea that “something like Covid has never happened before”.
- The most sensible people of all. Those who just buy through rain and shine and don’t try to time the markets by keeping money in cash, nor do they panic sell when markets are down. This group of people are also likely to own stocks and bonds, and simply rebalance when and if there is a crash.
- Lastly the worst of the lot. Those who engage in both fear and greed over and over again we per the below chart:
If you want a short answer then emotions and lack of information are the two biggest reasons.
The later affects people even if they have read loads of evidence that they shouldn’t panic.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 256.9 million answers views on Quora.com and a widely sold book on Amazon
In the article below I spoke about the following issues:
- Do you have any financial advice that isn’t talked about enough?
- How can millionaires get a visa to live in Japan?
- Is the capitalistic system rigged?
- Why might the US, against all odds, still be the number one country in the world by 2050 or 2100? As a Brit, I look at the evidence as to some of the reasons why America might remain number one.
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