This is a book about money management and investment. We are facing uncertain times. The global financial market is gearing up for a prolonged period of volatility as Britain looks to negotiate an exit from the EU. I wrote this post nearly a year ago hoping to educate myself but it’s more important than ever to share it with you today. Advice is only as good as the person giving it. In Tony Robbins’ Money Master the Game, you’ll hear from the most successful investors of our age, predominantly billionaires or money managers with billions under management. Cheesy title I know but I found the book very instructional. My current investment portfolio is loosely based on the All Weather System described below.
Please note that I’m not a qualified financial adviser so do your own research.
Realistically, I think 99% of you won’t ever read this book or any other finance books for that matter. So since I was taking notes anyway, I thought why not share it with you!
While some of the terminologies may seem foreign to you at first, do take the time to learn them. Because everyone is an investor and everyone is invested. Everyday, you’re make investment decisions, so you might as well learn how to play the game.
It’s also a lot harder to achieve financial freedom otherwise, because you’re trading time for money, which is always a bad trade. Luxury to me is about feeling unrushed, having an abundance of time to enjoy it with the people you love. That for me is true financial freedom.
If I had to sum it up succinctly:
Don’t lose money.
Don’t lose money.
Adopt asset allocation.
Diversity your portfolio.
Minimise your costs.
The notes are a bit rough since I’ve taken them for myself. But I’ve tried to tidy it up (you should see my original notes!)
Warren Buffett’s top two rules of investing. Rule number one is never lose money. Rule number two is never forget rule number one.
Because when you lose, you have to make significantly more to get it back.
There’s nothing wrong with setting aside a tiny percent of your risk & growth bucket do some day trading. But, limit this to 5% or less of your total assets or portfolio. If you’re not an Olympian athlete, why enter yourself in the Olympics? Same principle.
Asset allocation, where to park your money and how to divide it up, is the single most important skill of a successful investor.
This often explains more than 100% of returns in investment world, because we often have to make up for poor stock selection and market timing.
Ray Dalio is the brain behind the world’s biggest hedge fund. When the world went to shits in 2008 and the US market was down 37%, Ray’s fund lost less than 4%. His fund, Pure Alpha Fund, lost money only three times in 20 years, with the worst loss being 4%. This is the system Ray recommends, called the All Weather System.
It’s simple. Put 30% in stocks [e.g. S&P 500 index], 15% intermediate-term bonds [7-10 year Treasuries] and 40% long-term bonds [20-25 year Treasuries], 7.5% gold and 7.5% commodities.
The portfolio must be balanced at all times. Look to balance the portfolio annually. For example, if your equities are doing really well, then it’s time to sell some shares and put it into bonds to rebalance (note that this is completely counter-intuitive). Stocks are three times more risky (or volatile) than bonds. Therefore, having 50/50 portfolio of stocks/bonds, you really have 95% of your risk in stocks.
Every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything. The four economic seasons are:
Find the most efficient and cost-effective representations for each percentage (more details in the book).
David Swensen manages over $20 billion for Yale. David Swensen’s recommends the following portfolio allocation:
Note Swensen recommends a heavier weighting in the more risky asset classes (70%), comprising of 50% equities and 20% real estate (REITs). Note also that when he says Domestic Stock or International Stock, it doesn’t mean putting all your money into a single stock like BHP or CBA, but holding a diversified portfolio through an low-cost index fund (e.g. ASX200 or S&P500).
How the other experts recommend
“I’ve already said everything a person can say on the subject. Put 10%…in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
For his own portfolio, John puts 40% in bonds (total bond market index, tax-exempt municipal bond funds) and 60% in stocks (Vanguard index funds)
Advice #1: Everything I look at is the 200-day moving average of closing prices (this may be technical investor’s wet dream, see here for explanation)
Advice #2: Five to one, risk one dollar to make five.
98% should really predominantly go into index funds. They have the most predictable outcomes
Buy at maximum pessimism, sell at the peak of optimism
Look for asymmetric returns
Too long, we’ve programmed to think that the only way to get huge gains is by taking huge risks. Instead, the experts tell us to look for investments with asymmetric risk and reward. Paul Tudor recommended the five-to-one rule of investing, which means you risk a dollar to make five. This way, you can be wrong four out of five times (or 80% of the times) and still break even. Only when you’re able to quantify the downside (which should be limited) and the upside (hopefully unbounded), can you make a good investment decision. The example used is Kyle Bass’ purchase of $2 million in nickels, where the “melt value” of those nickels is 6.8 cents when the nickel’s intrinsic worth is 5 cents, meaning zero investment risk and 36% potential upside. Pretty funky stuff.
- ‘I’m not smart enough to know where the markets are going to go,’ says David Swensen. David manages over $20 billion for Yale and if he doesnt’ know, chances are you don’t have a clue either
- Putting all your money in the risk & growth bucket is a kiss of death
- Timing is everything (not). We tend to put money into the market and take it out at exactly the wrong time
- Diversify across time through dollar-cost averaging is how you make the volatility in the market work for you
- Although some have argued that you should get in as soon as possible to maximise the effect of compounding
- My takeaway is to invest whenever you have some money, unless you suddenly come into possession a large amount (say $30,000), then consider dollar-cost averaging
The philosophy in money management
- You win at the game of life by living on your own terms – as well and as fully as you can, for as long as you can
- Our decisions ultimately control the quality of our lives
- The quality of our lives is controlled by the meaning we give these things
- The reason we’re not succeeding, not achieving, not growing is not because of someone or something else beyond our control…but rather, our own limiting perceptions or beliefs
- Money itself is not the goal…The path to money, the places money can take us, the time and freedom and opportunity money can bring – these are what we’re really after
- If you’re struggling financially, might it be worthwhile to remember that if you make an income of just $34,000 a year, you are actually in the top one per cent of all wage earners in the world
- Three of the best ways to spend money and be happy are invest in experiences, buy time for yourself and invest in others
- The secret to living is giving.