I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 225 million views in the last few years.
On the answers below, taken from my online Quora answers, I focus on a range of topics including:
- How likely is it that the stock market will crash if there isn’t government stimulus in 2021? Are the two issues, stimulus and the stock market, really correlated?
- What are the alternatives to direct property investments? I look at REITS and loan notes, but what have been the returns and positives and negatives associated with these investments?
- Is economic collapse and hyperinflation likely in 2021 or 2022? Should we really listen to merchants of gloom who said the same thing in 2008-2009 due to 0% interest rates and QE over a decade ago?
- What is the value of wealth in reality? Is it just money or the ability to have choices, gain freedom and do things you otherwise couldn’t do?
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Without additional stimulus, will there be a stock market crash in 2021?
The two things aren’t correlated at all.
Remember these facts:
- 80%-90% of major US stock markets are controlled by institutional investors like hedge funds and banks
- A lot of the remaining money is controlled by wealthier investors.
Sure, there are more average and small investors than richer investors, but the total figures aren’t huge.
Unless a bunch of people all put their stimulus checks into one stock, like what has happened with GameStop, it is unlikely to affect markets.
There has never been a strong correlation between the stock market and economy.
These days, in a global economy where institutional players control a lot of the market, that is even less the case than ever before.
We saw that last year. The economy did badly, but the stock market did well.
The only time stocks did badly was during a period of blind panic where people speculated that stocks would do badly due to Covid.
Another example would be November. Many retail investors were worried about the US election.
Plenty of money was taken off the table. Then stocks soared after the election and again a few weeks later after the announcement of the COVID-19 drugs.
Stocks moving up and down, and occasionally crashing, comes with the territory.
Stocks will crash again in the future, yet I doubt they will crash due to stimulus checks.
Besides, crashes are natural and nobody should fear that. I am always amazed why people are afraid of it.
We just came from a year when stocks crashed hard (50%) and came back strongly.
It really doesn’t matter that much what happens in the short-term provided calmness is how you deal with any event.
Here is Peter Schiff predicting hyperinflation in about 2008:
The thinking was this would be caused by QE and 0% interest rates.
He also predicted:
- Gold at 5k
- Silver at $250
- Oil at $250 or more
- Most commodities to do well
- Emerging markets linked to commodities (like Brazil) to do well. That means both emerging market currencies and markets
- The USD to collapse
- Stocks to lag commodities like gold. He called the Dow’s move from 7k to 10k in 2010 a dead cat bounce (The Dow is now at about 31k by the way).
- A “debt bubble” was emerging and foreign investors wouldn’t want USD anyway.
- The economy would never recover until QE and 0% interest rates and government intervention was reversed.
What has happened since then? Well, almost the opposite! Most commodities have fallen in nominal terms.
All are below their 2011 real terms peak, including gold which hit 1,900 in that year…..about $2,400 in today’s price.
The USD has got stronger against most major currencies, even if it has given up some of those gains recently.
Stocks have outperformed commodities. Emerging markets has underperformed developed ones.
Inflation has been very low (2%-3% a year in the UK and US) with some countries like Japan and the Eurozone struggling with deflation.
Now here is Schiff again in 2020–2021 predicting……..
Due to……you guessed it:
- QE – this time it is much bigger!
- 0% interest rates – it is happening again!
In reality, the chances are very low because:
- There is no demand. Or very weak demand. People aren’t spending money on many things, and they won’t until the economy starts picking up again.
- People who compare QE to traditional money printing aren’t very sophisticated.
- The Fed can just increase rates if inflation picks up
Most of the people peddling these theories are in their basements listening to anti-Semitic conspiracy theories about how the Fed is secretly run by a bunch of wealthy families who are out to rid humanity of its riches.
The Rockefellers…..the secret masters of the world…..or is that Bill Gates now!?
They also believe silly things like 40% of the USD in circulation has been created recently which Graham Stephen dismantles here:
But for such true believers, they will never be convinced. I fully expect them to come back in 2030, 2035, 2040 or whenever there is new QE and say finally there will be huge inflation this time!
So, these people aren’t worth listening to. What is important to know is why these events happen in the first place.
Hyperinflation is caused when investors, and the public, lose complete trust in the government, to such an extent that they want to spend in the morning to avoid losing money in the evening.
That is most likely to happen if a completely unexpected event happens, like China attacks Taiwan, the US doesn’t come to its aide, and people sense that the “US empire” which backs up the USD is done.
Or that the political polarization gets so bad that there is a second civil war.
So, black swan events (highly unlikely but potentially deadly) events do occur and have throughout history.
Anything is possible, however unlikely. Yet if there is high inflation it won’t be due to QE suddenly spiking inflation upwards.
What is more likely is asset price inflation. From 2009 onwards people were more inclined to invest rather than keep money in the bank for obvious reasons.
As a final comment I would say that we can’t control the economy or inflation. What we can control is our own actions.
It therefore doesn’t make sense to worry about things we can’t control, but preparing for very unlikely events does make sense.
So many people lost money during Covid because they never considered the chances of an unlikely event happening.
Diversifying your assets and fixing the roof when the sun is shining always makes sense.
What is the value of wealth?
I presume you are speaking about the trade offs individuals need to make to get wealthy.
It depends really on the decisions you make. Some foolish people work so hard, doing a job they hate, to become wealthy, that they then spend that money on trying to restore their health.
People don’t need to make those kind of trade offs though, and it is a misconception that most wealthy people make that choice.
There are many routes to wealth which don’t involve working excessively hard at a job you hate, which in turn increases the risks of early health problems.
Those routes differ depending on the person. For some it is the ‘get rich slow’ route whereby the only ‘price’ of wealth is delaying gratification.
For others it might be taking calculated risks, such as starting a business, to follow passions and/or get wealthy.
For people like that there are extra responsibilities and risks compared to being a salaried employee.
Either way there is no such thing as a free lunch….for both people with and without wealth.
There is also declining marginal utility once you start adding wealth.
Going from struggling to relatively wealthy can lower your anxieties a lot.
But increasing from relatively wealthy to wealthy or very wealthy doesn’t always have the same huge effects.
So money isn’t everything by any means, but having no money can be!
Is buying and owning property the only way to invest in property?
There are many indirect ways to own property. One is through real estate investment trusts (REITS).
REITS are an investment company that operates in income-producing real estate in areas such as hospitals, shopping centres etc.
They can invest in both residential and commercial real estate depending on the REIT and which country they operate in.
Almost any investment platform has REITS on there.
Over time REITS have done relatively well as well. Take the Vanguard REIT ETF as an example:
Speaking about Vanguard, one of their studies showed that a stock and bond market portfolio with 10% allocated to REITS does slightly better than a pure stocks and bonds portfolio.
The reason is simple: REITS outperform the S&P500 during some periods and vice versa – stocks often beat REITS as well.
Therefore, if you buy, hold and rebalance, you get many benefits from REITS.
Other advantages include:
- Very low costs (0.1% per year in some cases).
- In some countries they can be held tax free in investment portfolios
- They are usually liquid if you have an emergency and you need some cash. You can also sell a portion of your REIT holding. With direct real estate, you usually need to sell the whole house and it can take months to find a buyer.
- Risk. With one REIT you can get diversified access to the whole world’s real estate market – there are some global REITs which are similar to global index funds. That is much safer than relying on one, two or three properties.
- Time. A 12% yearly net return with loads of time spent isn’t as good as a 10% return, if that return was gained by clicking a few buttons.
- You aren’t reliant as much on government policy compared to direct real estate. In many countries, new taxes seem to be announced on a yearly basis on property. Buying a REITs index isn’t a hot political issue compared to “harming first time buyers”.
You can also invest in some real estate firms via loan notes and other investment vehicles.
The major downside of REITS is that you can’t leverage as easily as buy-to-let real estate.
Yet in countless countries government have got wise to that and have made it more tax-inefficient to buy property in that manner.
That thereby negates many of the benefits buy-to-let investors received in the 1990s and early 2000s.
I have lost count of the number of British and other investors who used to be crazy for buy-to-let but have now existed the market due to those considerations.
As a final point, people should be especially concerned about foreign real estate.
When you are outside your home country, it is far easier to not know the practicalities.
In the answers below I focused on:
- Are there really secrets in how to become a high-net-worth individual in a world of open information on the internet? If not, what are the keys to becoming wealthy?
- Why do many people suddenly want to invest money? Is this something new due to low interest rates or has it always been there?
- Are Chinese cities such as Beijing, Shenzhen and Shanghai very expensive? What is the difference between the “expat cost of living” and local costs?
- How do people get rich from investing in global stock markets from a practical and safe point of view?
To read more click on the link below.
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Adam is an internationally recognised author on financial matters, with over 224 million answers views on Quora.com and a widely sold book on Amazon.