What’s In It For Me?
Do feel overwhelmed or intimidated when it comes to personal finances and investing? Achieving financial freedom isn’t complicated, but unfortunately the financial services industry’s marketing strategy is to make people think the exact opposite. In Money Master the Game Tony Robbins interviews 50 of the world’s most talented investors and financial minds. This book will help you take advantage of opportunities you would have potentially missed and prevent you from making the same costly mistakes that millions make every day.
The Big Idea
The book offers 7 steps to financial freedom, which at a high level can be summarized as:
Section 1: Understanding the power of compound interest is critical and can serve as motivation to save and invest as early and often as possible.
Section 2: The majority of the personal finance industry is out to make money off of you. Although a 1% fee you pay to a financial advisor may seem small, it is killing your portfolio value over time, taking years off your planned retirement date. Equally as bad are the high fees in mutual funds or 401k plans that eat into your account value. Stick with low cost index funds and you will not be disappointed over the long run.
Section 3: Many people have no idea how much money they will need to achieve financial security.
Section 4: Asset allocation (i.e. how your portfolio is allocated among various asset classes) is the most important decision impacting the performance of your portfolio over the long run.
Section 5: Develop a lifetime income plan to avoid ever running out of money.
Section 6: Tony interviews billionaire investors and shares how they invest.
Section 7: Learn how to enjoy your money by spending on experiences and giving to those in need.
Key Concept #1
Fees are the Ultimate Enemy To Investing
The mutual fund/ETF industry is one of the few industries where the more you pay, quite often the worse performance you achieve. Always look to use low cost index funds as the building blocks for your portfolio.
In addition to mutual funds/ETFs, 401(k) plans can be another source of excessive fees to watch out for. According to the Government Accountability Office, the average plan administrator charges between 1.3% and 1.5% annually. If you work for a larger company, you likely have lower plan administrator fees, but smaller companies sometimes struggle to get the economies of scale to lower fees in their 401(k) plans.
Another reason to avoid actively managed mutual funds is they typicality maintain a cash position to manage liquidity. According to one study, the average cost of cash drag on large cap mutual funds over a 10 year horizon was 0.83% per year. This may not be a direct fee, but it certainly cuts into performance. Additionally, actively managed mutual funds incur transaction costs typically much higher than passive mutual funds/ETFs. A 2006 study by business school professors concluded transaction costs for US actively managed mutual funds averaged 1.44% per year.
Key Concept #2
Don’t Time The Market
“We tend to put money into the market and take it out at exactly the wrong time.” Burton Malkiel, Money Master The Game p.349
Emotions are the enemy of investors, and trying to time the market typically always ends in a costly mistake. Even the best investors in the world cannot consistently time the markets. Therefore, the best strategy is to diversify your investing across time by dollar-cost averaging. If you are automatically enrolled in a 401(k) plan, you are already doing this since a percentage of your paycheck is invested every two weeks (or whatever frequency you receive paychecks). If you do not have access to a 401(k), consider automatically depositing money into your brokerage account each month.
The first 10 years of the 2000s is a prime example of the benefits of dollar cost averaging. One dollar invested in the S&P 500 Index on December 31, 1999 was worth 90 cents by the end of 2009, which is why this is commonly referred to as the lost decade of investing. However, if you had spread out your investments through dollar-cost averaging during the same time period, you would have made money.
American economist Burton Malkiel explained in a Wall Street Journal article on the merits of buy and hold investing that if you had invested in a basket of index funds, including US stocks, foreign stocks, and emerging market stocks, bonds, and real estate, between the beginning of 2000 and the end of 2009, you would have earned a 6.7% annual return. Not only is this an example of why buy and hold investing works, but why having diversification in your portfolio is essential.
Another proven technique to increase returns and take the emotion out of investing is to regularly rebalance your portfolio. Although it is debatable about how often you should rebalance, the consensus from the book seems to be once a year is sufficient, especially if your investments are subject to taxes.
Key Concept #3
Risk Parity
Throughout the book, Tony interviews many of the brightest minds in investing. Within the section on asset allocation, Tony’s interview with hedge fund legend Ray Dalio provides unique insight on an asset allocation known as risk parity. Most investors think that if they divide a portfolio between stocks and bonds (i.e. 60% stocks, 40% bonds), then they are diversified. Ray Dalio makes the point that to achieve diversification, one must diversify risks, not asset classes. His rationale is the risk, or volatility, of a 60/40 portfolio is almost 100% being driven by the stock allocation since stocks are much more volatile (i.e. riskier) than bonds. To build a truly risk balanced asset allocation, Ray recommends the following:
30% stocks
40% long term US Treasurys
15% intermediate term US Treasurys
7.5% gold
7.5% commodities
The above allocation may seem unorthodox, but keep in mind the goal is to balance risk. Since stocks are volatile, they need to be offset with a heavy allocation to bonds. Ray points out that there are only 4 aspects that move asset prices:
- Inflation
- Deflation
- Rising economic growth
- Declining economic growth
Since it is impossible to predict which regime will come next, the risk parity allocation is prepared for any of the four regimes. In a rising growth, falling inflation environment, stocks will perform well. In a rising inflation, rising growth environment, commodities will perform well. When growth is falling or there is a deflationary environment, bonds perform well. The point is the portfolio is designed to be risk balanced, while a traditional 60/40 portfolio is only positioned for a rising growth, falling inflation environment since the majority of the risk is in the stock allocation. 2008 was an excellent case study, with the 60/40 portfolio down approximately -15% and the risk parity portfolio down -3.9%. In fact, when the above asset allocation was back tested over the past 30 years, -3.9% was the worst returning year. The annualized return was 9.7% and you would have lost money in only 3 years out of 30.
The risk parity approach may not be for everyone, particularly young investors looking to maximize their account balance over a long time period, but for risk averse investors or those near retirement, it could be an asset allocation worth serious consideration. For more detail on this, check out my blog post on Risk Parity For Late Cycle Investing.
Key Concept #4
Financial Independence
Part of the reason why many people do not save enough for retirement is because it is an abstract concept, making it hard to find the motivation to save. How do you know how much to save and if your nest egg will last your entire lifetime? The first step toward tackling this problem is to brainstorm what your ideal lifestyle would look life, and to start, you need to evaluate where you currently are. Tony lays out the five components, or dreams, to financial independence:
Dream #1: Financial Security
Imagine if you had all your basic living needs covered for the rest of your life, which would include housing, food, and transportation. The book gives a hypothetical example of someone who needs $34,000 a year to cover her living expenses of housing, food, transportation, and basic healthcare. The book recommends that approximately $640,000 should cover these basic needs. Although this is a large number, and she would still have to continue working to cover other expenses, it is the first step on the journey towards financial independence and brings piece of mind knowing that the she has enough money to cover the main cost of living components.
Dream #2: Financial Vitality
This goal is mile marker on the path to financial independence and is intended to give you some extra money for clothing and entertainment expenses. To calculate financial vitality, take half of your monthly expenses for clothing, dining/entertainment, and other small indulgences and add those figures together.
Dream #3: Financial Independence
Financial independence is achieved when you no longer have to work to have the same lifestyle you have today because the annual interest you earn from investments will cover your expenses. Money is now working for you, and you are no longer working for money.
Dream #4: Financial Freedom
Financial Freedom goes a step beyond financial independence because it represents having enough to cover two or three significant luxuries that you want in the future. It answers the question, “What annual income would I need to have the lifestyle I want and deserve?”
Dream #5: Absolute Financial Freedom
This is the last level of financial freedom and represents having enough to do anything you want, anytime you want. For many this may be out of reach, but the author makes the point that often times your wildest dreams may not cost as much as you think. For instance, let’s say you want to own a plane. Instead of owning a plane, you could rent one and get a lot of the same satisfaction for significantly lower cost.
The point of going through the above 5 steps is to remember that you are the creator of your life, and sometimes it easy to forget just how much you have already created. Think back to what once seemed impossible in your life, such as getting a dream job or living somewhere you always wanted to live. It may be easy to take these things for granted now, but if you appreciate what you have and get back in the mindset of what allowed you to accomplish these things in the first place, it can propel you forward. Tony gives a three step process to incorporate things that seem impossible into your life:
Step 1: Unleash your hunger and desire, and awaken laser-like focus
Wherever focus goes, energy flows. When you become inspired by something that excites you so much you can focus with laser-like intensity, and then step 2 happens:
Step 2: Take massive and effective action
If your desire is truly unleashed, you will do whatever it takes to make your dream a reality. In addition to taking massive action, you need effective execution. For example, you could put all your effort into saving for the future, but if you invest in active mutual funds with high fees, you may be getting no where.
Step 3: Grace
Some may call it luck, coincidence, fate, or God’s hand. If you look back on situations in your life, there are probably a few serendipitous moments that you are very thankful for. When you take care of the first two steps, you put yourself in a position to get lucky.
Money Master The Game p.227-228
Key Concept #5
Living a Balanced Life and Giving Back
“I’ve always taught that success without fulfillment is the ultimate failure.”Money Master The Game p. 575
Although the majority of the book discusses strategies to create and sustain wealth, the final section puts everything in perspective by discussing other types of wealth. After all, there are many types of wealth, including emotional wealth, relationship wealth, intellectual wealth, physical wealth (in the form of energy, strength and vitality), and spiritual wealth. Unfortunately one of the biggest mistakes people make is mastering one form of wealth at the expense of all the rest. It is impossible to live an extraordinary life if you don’t master the game of relationships, the game of fulfillment, and the game of health.
Our decisions control the quality of our lives. Tony Robbins has found that there are three key decisions that we make every moment of our lives. If we make these decisions unconsciously, we end up with lives like the majority of people who end up emotionally exhausted, out of shape physically, financially stressed, and often too bored or too comfortable with their intimate relationships. However, if you make these three decisions consciously, you can literally change your life. Below is a brief summary of the three decisions:
Decision #1: What are you going to focus on?
What you focus on, and your pattern of focus, shape your whole life. What do you tend to focus more on, what you have or what’s missing from your life? It is important to spend time each day practicing gratitude by thinking or even writing down what you are grateful for. The second pattern of focus is asking yourself if you tend to focus more what you can control or what you can’t control. If you focus more on what you can’t control, there is no doubt you will live a more stressful life.
Decision #2: What does this mean?
Ultimately, how we feel about our lives has little to nothing to do with the events in our lives, our financial condition, or what has or has not happened to us. The quality of our lives is determined by the meaning we attach to these things, but most of the time we are unaware of the impact of these quick meaning decisions that are made in our unconscious mind. Victor Frankl is a prime example of someone who found meaning even in the extreme suffering of Auschwitz, not only in the deep desire to survive, but to save the lives of so many others in the future by saying, “This will never happen again.”
Decision #3: What am I going to do?
Once we create a meaning in our minds, in creates an emotion which leads to action. If you want to shape your actions, the fastest way is to change what you focus on and change the meanings to something more empowering. It is useful to become aware of what your patterns are when you are frustrated, angry, sad, or lonely because you cannot change your pattern if you are not aware of it.
We have all been taught that money cannot buy happiness, but research shows it in fact can, depending what you spend it on. Below are some ways money has been shown to buy happiness:
Investing in experiences: such as travel, learning a new skill, or taking courses
Buying time for yourself: outsource your most dreaded tasks, such as house cleaning, to free up time to pursue your passions.
Investing in others: this is perhaps the greatest thing you can do with your money that will bring increased happiness. Giving your money away has been scientifically proven to make you happier. As Tony Robbins mentioned in the book, “the secret to living is giving.” (P.603)
“Live life fully while you’re here. Experience everything. Take care of yourself and your friends. Have fun, be crazy, be weird. Go out and screw up! You’re going to anyway, so you might as well enjoy the process. Take the opportunity to learn from your mistakes: find the cause of your problem and eliminate it. Don’t try to be perfect; just be an excellent example of being human. “ Tony Robbins, Money Master The Game p. 607
Apply It
*Look at the investment options in your 401(k) plan and make sure you are investing in low cost index funds.
*If you use a financial adviser that charges a fee based on your percentage of assets invested, consider switching to an adviser that charges a fixed fee per hour of advice, or better yet, manager your own money. Even a 1% management fee can dramatically decrease the size of your investment portfolio over time.
*The quality of your decisions control the quality of your life. Write down things in your life that you spend time focusing on that are out of your control. Replace these items with things you can control. Consider writing down three things you are grateful for each day, which trains the mind to focus on what you have instead of what is missing from your life.