Notes from Tony Robbins’ “Money: Master the Game” book (Chapter 4)

Welcome to the summary of chapter 4 from Tony Robbins’ “Money: Master the Game”.

If you used chapter 3 to establish your financial dreams with concrete numbers in mind, now chapter 4 goes through the how and the where you can invest the money, and what strategies are suited for the effect.

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Asset Allocation

Tony starts the chapter with two major quotes:

Asset allocation is the most important investment decision of your lifetime. (…) Anybody can become wealthy; asset allocation is how you stay wealthy.

Quite an ice breaker huh? This definitely tells you to allocate your investments wisely to win the game long term.

But let’s take a step back — what exactly is asset allocation? From the mouth of the master:

Asset allocation is more than diversification. It means dividing up your money among different classes, or types, of investments (such as stocks, bonds, commodities, or real estate) and in specific proportions that you decide in advance, according to your goals or needs, risk tolerance, and stage of life.

In other words, you’re looking to invest in different financial instruments. How much you spend on each piece of the pie will vary based on how far and how quick you want and can get there.

Among ongoing fees for the investments and sheer difficulty in trying to read the market, asset allocation will underpin your success — it will alleviate fee costs, and balance out wins and losses across the portfolio to tide you over.

The Security/Peace of Mind and the Risk/Growth Buckets

Let’s imagine for a moment that your asset allocation consists of two buckets. After all, you can make the right investment, but happen to do it at the wrong time and lose a lot of money. Once again, you need a good combination of investments to win most of the time.

The first bucket will go towards safe investments. They won’t have tremendous returns, but you know the money will be there when needed. That is your Security/Peace of Mind bucket.

The second bucket is the Risk/Growth bucket. You must be prepared to lose however much money you invest here. There is a higher chance to have greater returns, but you need to make sure you’re investing money you can afford to lose if all hell breaks loose.

If you’re asking what portion of your investments goes into each bucket, then consider:

• What stage of life are you at — how much risk are you able to incur?
• If you were to invest € x, will that amount put your financial health on the red if it goes on the Risk/Growth bucket or should it go towards the Security/Peace of Mind for a safe small return?

Security/Peace of Mind Investments

There are a plethora of investments that can go in the Security/Peace of Mind bucket for slow but steady returns.

Before diving into the specifics, here is the list we will walk through for investment options:

• Cash/Cash equivalents
• Bonds
• Certificates of Deposit (CDs)
• Your home
• Your pension
• Annuities
• Life insurance policy
• Structured notes

Cash/Cash equivalents

You need to have some cash on hand, that is, liquidity, if sh*t hits the fan. This can sit in your bank account.

You can potentially look into cash equivalents: ultra-short-term investments, usually money market funds. These are mutual funds made up of short-term low risk bonds that still allow you continuous access to your money – liquidity. They also yield a slightly higher return rate than if you had the money sitting on the bank account.

Do note that banks typically offer money market deposit accounts instead. These are similar to savings accounts so banks are allowed to invest that money in short-term debt and then pay you a slightly higher return rate. If you go with this route double check what guarantees are provided, because they might guarantee some protection to your investment.

Bonds

In principle, you are lending money to an institution, like a bank, and are guaranteed a return on investment at the end. This is good on paper because you know there will be a return to the investment, and you might even be paid dividends throughout depending on the bond.

But be wary that a bond’s strength will vary with different institutions — e.g., buying into a bond with a municipal institution will not be as strong as a bond from central government.

If you’re looking to invest in Bonds, Tony advises to probably go for a low-cost index fund.

Certificates of Deposit (CDs)

With Certificates of Deposit (CDs) you are the one loaning money to the bank, with an upfront guarantee of return on investment. Like bonds, note that you might buy into a market-linked CD where its performance is tied to the market performance — a regular old CD will instead be a fixed return.

Your home

Straightforward one. Your primary residence shouldn’t be used with the mentality to flip. Use it as a safe investment so this is your home, period. Then you might have a fixed-rate mortgage to fight off inflation, and even rent out a room if you can afford it.

If you still want to invest in real estate, leave it for the Risk/Growth bucket. There are options such as first trust deeds, real estate investment trusts (REIT), senior housing, income-producing properties, and more. These will come up later in the Risk/Growth bucket section.

Your pension

Are you lucky enough to have a pension plan? Good, leave it be and don’t think about an early pay-out.

Annuities

A lot of teasing for chapter 5... Tony teases the majority of annuities are riddled with high fees, but the select minority will yield the kind of returns you’d get on the Risk/Growth bucket with the tranquillity of the Security/Peace of Mind bucket.

Life insurance policy

Another instrument teased for chapter 5. This one provides security for your family when the worst happens to you. Moreover, there is apparently a type of life insurance (not the term life type, i.e. death) that will provide you tax-efficiency on top of an income life. Much like you I’m curious to read more on it in chapter 5.

Structured notes

Another instrument where you loan money to banks. The bank promises to return your money after a fixed period, and usually you’ll find they promise to, at least, return your initial investment, plus a substantial fraction of the gains. For example, it could promise to cover 100% of the downside, i.e. cover the entire amount you loaned, plus pay you 90% of the return on the investment.

Structured Notes sound too good to be true, but “the longer you don’t need liquidity, the more the market will pay for that”.

As always, perform your due diligence upfront on matters such as fees related to that Structured Note and, more importantly, weigh the investment decision against your point in life — can you spend that money now and lose access to it until the agreed time of return?

Risk/Growth Investments

This next set of financial instruments are truly high risk-high reward — just as you can win a lot of money, you better be prepared to lose some if not all the investment. First the complete list, followed by the detailed explanations:

• Equities
• High-yield bonds
• Real estate
• Commodities
• Currencies
• Collectibles
• Structured notes

Equities

For starters, equities are a synonym to stocks, owning shares of individual companies, or even other instruments that allow you to own multiple shares at once, namely mutual funds, indexes, and exchange-trade funds (ETF).

Tony spends the rest of this section to provide a little clarification on ETFs and there are three bullet points to present here:

• They follow a collection of assets and/or trace an index (e.g. S&P 500) similarly to mutual funds and index funds, respectively
• They can be traded throughout the day unlike the mutual and index funds
• When you buy shares of an ETF you are buying shares of an investment fund that owns the underlying stocks, commodities, bonds, whatever the case may be
• You can either buy into ETFs to trade all day long, or attempt to buy and hold for longer periods

High-yield bonds

Also know as junk bonds because they have a very high risk associated. Identical to the bonds described in the Security/Peace of Mind bucket, but these truly embody the high risk high reward mantra.

Real estate

You can own a house and then rent rooms or even the entire house. You can also buy a house, restore it and flip it for a profit.

You can also buy into Real Estate Investment Trusts (REIT) as highlighted earlier. These trade like stocks which means you can buy shares of a REIT index fund to buy into a a collection of diverse REITs.

Commodities

This includes gold, silver, oil, coffee, cotton, etc.

But these are essentially not great choices unless you’re betting on the price of, for example gold, to go up in the long run. Obviously if society collapses these could probably be traded but otherwise it might not be the greatest investment — Tony does tease the advice to own a small amount of gold in your portfolio.

Currencies

Mostly discouraged by Tony, but still an option if you’re up for trading currencies.

Collectibles

Again a potentially niche-scenario investment, one that will require quite a lot of knowledge to have any real returns. These include sports cards for example.

Structured notes

The placement of structured notes in the Risk/Growth bucket applies only to the notes that don’t have a failsafe money back guarantee. You can buy into a structured note with 25% risk: you still get your money as long the stock doesn’t fall by more than 25%, yet you can maybe get an increased return of 150% of the original investment.

This is why structured notes are in both buckets — the subset in this bucket pertains to you risking some money for a higher return than you’d get with guaranteed safety.

A sample portfolio

With the distinctions between the two buckets clarified, Tony goes on to share a portfolio proposed by David Swensen. As usual, this is USA-centric and of course the book itself is 10 years old, so take this portfolio with those two factors in mind.

One more detail, each class identified below are all different classes of index funds — in other words, the portfolio is fully focused on index funds, which allow for a big diversity of investments in principle, rather than betting, for example, on individual companies.

• Domestic stock — 20%
• Internal stock — 20%
• Emerging stock markets — 10%
• Real Estate Investment Trust (REIT) — 20%
• Long-term US treasuries — 15%
• Treasury inflation-protected securities (TIPS) — 15%

From this list of index funds, the first four make up the Risk/Growth bucket. They all offer potentially high returns, at the cost of maybe losing most if not all your money in that bucket. The last two make up the Security/Peace of Mind bucket; small returns, but near guarantee that you will see your money again.

According to the statistics provided, this portfolio stood quiet well against the market because the profits and losses manage to balance out the overall investments. For instance, during the financial crash in 2008, this portfolio only lost 31% opposed to the average 37% loss.

One important thing to note is that, over time, the diversification strategy must change to accommodate the risk you can tolerate. In practice, the younger you are the more you can likely bet on the Risk/Growth bucket because you have more time to recover the eventual losses. Later in life you need to worry about stability and ensuring that, while investing, even if you collect small returns, it’s still an overall net positive for your bank account.

The Dream Bucket

There is a third bucket to this conversation, and that is the Dream bucket. We’ve talked secure investments, we’ve talked risky investments, now we’re talking about splurging on you and your family/friends/whoever you want to splurge with. This is some money you set aside to spend in the now for some good times. As Tony puts it,

Your dreams are not designed to give you a financial payoff, they are designed to give you a greater quality of life.

This is obviously a restricted amount to keep your investment plan on track. However, it’s important to understand at the end of the day you still want to have enjoyment and use money for the effect. Hence, there is a time and place for you to take some money and have fun with it.

It’s also worth pointing out ways to fill this dream bucket: a bonus at work, maybe some profits from the Risk/Growth bucket, or by saving a percentage of the salary to buy that car or house later.

Moreover, when looking at (financial) returns you can, for example, invest one third in the Security bucket, one third in the Risk bucket, and the last third in the Dream bucket.

Timing is everything?

As discussed earlier in the book, almost nobody can beat the market. Almost no one can buy stocks at the right time and then sell them at the exact perfect time to maximise profits.

Asset allocation and diversification can be tremendous helpers to balance out fluctuations. The trouble comes in your timing to buy and sell. You might be investing right at the peak before interest rates spike, or you might have sold in a panic when the evaluations came crashing down.

Tony provides a three principles to attenuate the issue of timing and take emotions out of the mix simultaneously:

Diversify across time

If you made a plan to invest on a monthly basis then follow through. You planned 60% of the investment in the Risk bucket and 40% on the Security bucket? Then follow through with the plan. The volatility might actually work in your favour this way.

Say you were investing into an index fund A that cost €100 per share on year 1, decreased to €75 on year 2 and went up in year 3 to €100 again. Say there is also fund B that cost €100 per share on year 1, increased to €110 on year 2 and went up to €130 in year 3.

Fund B might seem more attractive thanks to the consistent increases. Actually, fund A turns out to provide better returns — because you follow through with the investment plan, on year 2 you get to buy more shares thanks to the lower price. The increase on year 3 will net you an even better pay-out because you will hold more shares evaluated at a higher price.

And for clarity, this does not apply only to stocks and index funds, the advice holds true across the entire portfolio.

P.S. this practice of investing a fixed amount on a regular schedule independent of the market price is known as dollar-cost averaging.

Rebalance your portfolio at regular intervals

The investors interviewed by Tony have a consensus on this topic: to be a successful investor you have to rebalance your portfolio at regular intervals. In other words, regularly assess the asset allocation in your portfolio and adjust accordingly.

Let’s take a scenario: some assets in the Risk bucket might be performing really well. You can take the chance to rebalance and invest some of that into your Security bucket and ensure the continued steady returns.

If for some reason your asset allocation has gone out of balance, let’s say your 60–40 split has gone 75–25 because the stocks in the Risk bucket have soared, then you may consider selling some to achieve balance again, or reduce the investments into the Risk bucket for a moment.

Tony presented various investor examples which ranged from rebalancing as soon as the allocation ratios went off, to rebalancing twice or even once a year. Ultimately, set an interval for you to stick with for the revision, and take into consideration other variables such as fees for changing investments.

Tax-loss harvesting

As we know, a big topic with investments and returns is tax-efficiency.

At strategic points that you’re already at a loss (say a stock that went down in the gutter), you might as well sell it for the sake of offsetting and/or reduce your capital gains, leading to a lower hit from taxes.

Closing thoughts

And so we’ve reached the end of chapter 4! As usual, let’s recap what was discussed:

• Asset allocation is everything — diversify across Security and Risk buckets, but also financial instruments
• Leverage dollar-cost averaging to alleviate market fluctuations and take out as much emotion as possible from investments
• Have a Dream bucket to spice up your life once in a while to reap benefits of all this effort
• Use rebalancing and tax-loss harvesting to help maximise returns and minimise losses

And before closing shop, let’s take a moment to review what has been covered so far in the book and these summaries across the four chapters:

• On chapter 1 you’ve made the decision to set aside an amount of your salary to go automatically into a savings account every month
• On chapter 2 you’ve learned the rules of investing and debunked 9 myths and/or marketing tricks
• On chapter 3 you’ve put to paper your financial dreams and how much they actually cost to achieve
• And now with chapter 4 you have learned how to diversify your portfolio and make it grow over time

Now with chapter 5 on the horizon, there is promise in the air with the title “Upside without the downside: Create a lifetime income plan”!