I often answer the questions of clients, readers and subscribers on Quora, where I am the most viewed writer globally on investing, YouTube and countless other social media outlets.
In the answers shared today I focused on:
- With stocks at record highs, is a crash imminent? Ironically, I answered a question from 2016 or 2017 on this topic, but many people are asking the same question today.
- Is it really possible to double your money, or better, whilst taking little or no risk?
- Does money really change people?
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This question was asked during 2016 or 2017.
It is timely in 2021 though, as it was in the first half of 2018, 2019, early 2020 and from mid-late 2020 onwards.
At the time this question was asked, people were terrified of Trump, Brexit and many other things.
I don’t know the exact date this question was asked, but the Dow was probably at about 20,000.
It is now at 31,000. The Nasdaq was at about 6,000 and is now at more than 13,000.
This once again shows that nobody can time markets, and trying to do so isn’t profitable.
Moreover, let’s not forget that
- There have been two significant corrections since this question was asked. In late 2018/early 2019, stocks fell about 25%. People forget about that now. They fell about 5% in 2018 for the year. In 2020, stocks fell about 50% at one point, but rose 10%-20% for the year.
- So, there was not one but two significant crashes.
- The crashes didn’t harm investors. They benefited from lower prices for a few months. Even if they didn’t add more during those periods, markets are much higher today than in 2016–2017.
- Crashes, and especially all-time highs, aren’t unusual. There are regular corrections and crashes, whilst markets usually hit record highs numerous times a year, or every few years. Occasionally it takes longer to hit record highs. Take the Dow as an example – Closing milestones of the Dow Jones Industrial Average – Wikipedia. What’s more, it is quite normal for markets to hit record highs 10, 20 or even 70 times a year. Not every year, but it isn’t unusual.
- What markets crash and soar is unpredictable. Look at last year. Markets soared about the second European lockdown and the disputed US election, and even before the vaccine was announced. They have also soared in recent years during the North Korea stand-off and Trump surprising election win in 2016.
- The media have regularly said that markets would crash on the events mentioned on point number 5.
- Anybody who is diversified in international and local ETFs, alongside bond market funds, doesn’t need to worry about a crash, if they are long-term.
- People who keep money in cash, waiting for a crash, usually wait even longer once one happens. I had a friend who said he would get in during the next crash. The Dow fell to 17k-22k for days in 2020, even though it only stayed at 17k-18k for a short-time. What did he do? He decided to wait for markets to dive again! It never happened. Now the Dow is at 31K and he is “looking forward” to a possible “crash”, bringing the Dow back down to 25k. He doesn’t even see the irony.
- Even people who say they won’t panic during a crash often do. Often they start sentences with “I know I shouldn’t time markets, but this time is different because…….then they rumble about 9/11, covid or any other reason why this time is different. In the end, they always regret it. However, there are always a certain percentage of people who never learn. Some of the same people I know who didn’t want to invest during 2016 due to the US Election, and were amazed at the new heights they hit under Trump, didn’t invest in 2020 because….of the US Election! Once again, they were amazed at how markets behaved.
- Even if there is a crash, and the recovery is slow, like in the 1930s, this benefits younger and even relatively young investors. Imagine if markets had stayed low for 10 years after Covid? What a buying opportunity. Markets were stagnant from 2000 until 2010. Again, a buying opportunity.
- People lose far more from worrying about crashes, and panic selling once it happens, than the crashes themselves.
- I have yet to meet anybody who has beaten the market from timing it. I don’t even know anybody who knows somebody who has.
The bottom line is this. Market timing doesn’t work. Markets aren’t predictable in the short-term. They can act in the opposite way to how people expect.
The history of markets has been like a volatile rollercoaster which usually goes up, but sometimes goes down and crashes, only to recover and hit fresh highs:
Also, don’t forget that a loss and decline aren’t the same thing.
If you press the sell button during a crash, then that is a problem. If you don’t, then that isn’t an issue at all.
All of this doesn’t mean that a crash won’t happen this year or next.
It might or might not happen. That doesn’t mean it is profitable to not invest now and try to time the markets.
There is no 100% risk-free option. One of the reasons for that is that the past isn’t always a perfect guide for the future.
Just because something has never happened before, doesn’t mean it can’t again.
Nevertheless, one strategy which has had an 100% track record of doing much more than doubling your money is:
- Holding your home market index, an International one and a bond market index
- Investing monthly to reduce the risk, regardless of whether markets are up, down or sidewards.
- Buy, hold and rebalance between the positions you hold. This reduces the risk a lot.
- Reinvest the dividends
- Be ultra long-term. Not even 10 years but decades.
- Don’t panic sell during crashes. Switching off the media during times like 2008 and early 2020 helps with that.
- Don’t pick individual stocks or even random ETFs. Just pick 3–4 as per the above.
- Get advice if you don’t have enough knowledge and/or you do but find controlling your emotions difficult.
Holding such a strategy hasn’t failed even in “black swan” situations.
For example, even if a Japanese investor had bought the Nikkei at the very top, he or she would still easily be higher today following such a strategy.
As the graph below shows, one dollar, Euros or Pounds has grown many fold invested long-term into markets:
The only thing that puts people off markets is the volatility but this isn’t a problem if you follow the above.
If you want something even more conservative, go for 60% in the S&P500 or MSCI World, and 40% in bonds.
Yes bonds don’t pay much anymore, but such a portfolio probably will be up over a 5–10 year period:
If the approach above is too boring for you, there isn’t a “low risk” way of doubling your money otherwise, at least adjusted for inflation.
Historically you could just compound your money via bank deposits, which used to pay above inflation. With 0% interest rates that option is gone in most countries.
The only thing I would say is being too risk-adverse often leads to more relative losses long-term.
Take the 60%-40% portfolio as an example. It will pay more than cash. Much more in fact.
Yet it will almost for sure be beaten easily by a 90% stock market portfolio.
Vanguard has done research which has suggested as much:
It will just be less volatile.
The bottom line, then, is that being long-term and diversified reduces your risks, but can cap the upside.
That depends on the choices one makes. Let’s take an extreme example. Winning the lottery:
Think about the people in your network – friends, family and associates. I am sure you can think of some people with conservative, introverted and/or untrusting personalities.
Those kinds of people might be less likely to boast or change their lifestyle. Some might even make few public changes, keeping their jobs and businesses.
It might be a complete secret. There are plenty of “secret” multimillionaires who keep their wealth private and live frugal lives.
This cleaner/janitor was wealthy, having invested small amounts for decades. Nobody knew until he died and left loads of money to charity:
There are plenty like him. In comparison, there are other people who are flash. Some lose the money quickly due to this, and others are in the middle.
It just depends on the person’s character and the choices they make. The commonalities between them all is that wealth gives people more:
- More choices
- The ability to live a more interesting life
- Less financial pressure if the wealth is used properly
It doesn’t automatically buy happiness. That depends, again, on how you use the wealth.
Sometimes success in any domain, and not just financial, just shows people’s true colours – for good and bad.
My answers on Quora.com have received over 219 million answer views in the last few years, making me one of the most popular writers on that social media platform.
In the answers below I focused on:
- What does a beginner need to know in terms of investing in the stock market? More importantly perhaps, what things are often neglected by people new to investing.
- Is it possible to support yourself financially from a stock market investment portfolio? In other words, can you eventually stop working due to your stock investments? What do people get wrong when they think about “passive income”?
- If you want to become a millionaire investing in stocks, how much do you need to invest every month or year? Is it less or more than you might expect?
Here is a preview of one of the answers:
Of course you can. Most people, indirectly due to pensions, are already supporting themselves from the stock and bond markets.
For most people it is the eventual goal, however. Studies show that you can only realistically withdraw 4%-5% of your portfolio every year in retirement if you want the pot to last 30 years or longer.
There is some academic debate about how much is safe to withdraw.
The founder of the “4% rule of retirement” below has said that 4% is too conservative in most situations, and 5% is usually OK.
Nevertheless, it has to be remembered that:
- 4% is safer. Even somebody who retired a day before the 2000 crash and 8 years before the 2008 one, would now have more money in real terms than when they retired. This is assuming they withdraw 4% per year and had 40% in US stocks, 30% in International and 40% in bonds.
- Withdrawals only work if people stay calm during the bad times. Of course even a 3% rate of withdrawal won’t work if people panic sell during crashes, like the 35% of over 65s which Schwab said panic sold during the 2020 crash.
- It is always better to have a conservative buffer.
Most importantly, it is a fantasy to believe that somebody can keep picking the next Amazon, Tesla or Netflix, and retire from say 50k.
Realistically, then, most people need a two-stage process
- The accumulation phrase. This means investing every month no matter what. Investing into ETFs that track the market and other instruments. Reinvesting dividends. Being aggressive. That means focusing on stocks much more than bonds.
- The preservation phrase. This means having more in bonds, and being careful about how much is withdrawn every year. Just like the accumulation phase, being calm and balanced is key.
So, people definitely can support themselves from the stock market.
It just takes time unless somebody has a lot of capital to begin with.
Pretty much 98% of the people I know that have gotten wealthy from investing have done it patiently and long-term.
Get rich slow as opposed to fast. People who think “passive income” is easy if you don’t have a lot of capital have been misread, unless they want just a small amount of income.
As an aside, supporting yourself from a liquid portfolio in retirement is much easier than illiquid assets like real estate.
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