Money: Master the Game

Hello fellow primates,

I've been a WSO contributing blogger for several years now, but just started this account on WSO to correspond with a personal blog I recently launched, Deconstructing Excellence. In this blog, I post detailed summaries of books that I have found useful in improving my life in some way.

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Money: Master the Game

By Tony Robbins
Page count: 616
Money: Master the Game on Amazon

Tony Robbins isn't the first person you'd think would be the one to write a book on money, but on Tim Ferriss' recommendation I picked up a copy. As a finance major with an MBA to my name, I was skeptical that I could learn much about money from a "feelings" guru like Tony. I was wrong - this book might have given me more useful lessons in finance than my entire formal education.

Tony began building this book by interviewing a litany of investment titans - Warren Buffett, Charles Schwab, Carl Icahn, Ray Dalio - pretty much the entire investing all-star team. Most of us would never get the chance to gain access to any of these masters' knowledge, but Tony used his conversations with all of them to synthesize a money manifesto.

Section 1: Welcome to the Jungle: The Journey Begins with This First Step


The first chapter is an introduction to classic Robbins psychology. Tony begins by lamenting that money is somewhat of a taboo subject, asserting that money is an essential part of our holistic well-being, and explaining how he went about building the book by interviewing the best of the best. His first conclusion is that it's very difficult to earn enough money through your job to have financial freedom, so you need to save and invest. Develop the mindset of an investor, rather than being only a consumer. The only way to overcome ingrained human psychology and actually save is to create a plan and automate your investing, so set up the automatic withdrawals and forget about them.

Section 2: Become the Insider: Know the Rules Before You Get in the Game


Because money is such a misunderstood topic, especially by those who think they know what they're doing, Tony goes into the nine financial myths that have to be busted in order to start building a correct understanding of how money works.

Myth #1: The market can be beat. Only a few gifted people can beat the market's returns consistently, and neither you nor your financial advisor are one of them. Less than 4% of actively managed mutual funds beat the market, which is far, far worse than a coin toss. You're much better off buying a passively managed index fund, which simply matches the overall market.

Myth #2: People are telling the truth about fees. The average cost of owning a mutual fund is 3.17% a year when you include all the hidden fees - expense ratio, transaction costs, cash drag, unseen taxes, etc. That may not sound like much, but for each 1% increase in fees, 20% of the final value of the typical retirement portfolio is eaten away. The end result is that even though the percent looks small, it can result in (literally) most of your savings ending up in someone else's pocket. Again, investing in index funds with fees around 1% will make an enormous difference in your financial storehouse.

Myth #3: People are telling the truth about returns. A core truth about investing is that it is much more important to avoid losses than to get gains. Why? If you have $100 in your portfolio and you lose 50% the first year, you then have $50. If you then gain 50% in the second year, you end up with only $75. Your average (time-weighted) return was 0% (up 50%, then down 50%), but your real (dollar-weighted) return was negative 25%. Which type of returns do you think mutual funds like to report?

Myth #4: Your broker is on your side. Most brokers are perfectly good and honest people. However, most of them also probably don't understand the three myths we've just covered. On top of that, the broker model is a serious conflict of fiduciary duties. Your broker has a responsibility to increase your money as well as a responsibility to increase his company's money, and the two duties are mutually exclusive. A much better decision is to go with a registered investment advisor (RIA), who gets an annual fee from you rather than commissions from the mutual funds, to manage your investments. Go to the National Association of Personal Financial Advisors or Stronghold Financial website to find an RIA.

Myth #5: Your 401(k) will set you up for retirement. In my mind before I read this book, I had a mental image of the 401(k) as some kind of timeless bastion of classic investment best practice. Not so - the 401(k) is a (failed) social experiment that has only been around for 30 years. The unique bull market conditions of the 80's and 90's blinded society to a point where we believed that the 401(k) system was effectively setting people up for retirement, but with the recent financial crisis, it became more apparent that the system is a failure. The factors listed in Myths 1 - 3 severely limit the growth of your retirement portfolio, and taxes on withdrawals will slash your nest egg further. On top of that, the 401(k) doesn't do anything to protect against the unfortunate retirement timing that left many people with a fraction of their savings after the financial crisis.

Hopefully you've already avoided the traditional 401(k) or IRA in favor of a Roth, in order to solve the tax problem. You can use an IRA instead of a 401(k) to avoid the factors in Myths 1 - 3, but IRAs have much lower contribution limits, and don't let you take advantage of matching contributions from your employer. Tony recommends that you go to the online fee checker here, which will show how much you're really paying in fees in your company's 401(k), and then approach your employer with the results. Because of a new law passed in 2012, employers are legally required to compare their 401(k) plans to make sure the fees are reasonable. Hopefully this combination of information will be enough to convince your employer to consider offering low-cost index funds in your plan.

Myth #6: Target date funds are a good way to allocate your investments. Since ordinary investors have no idea how to diversify their investments, many choose a "target date" fund where their mix of investments changes based on their age. The point is to get higher returns when you're young and can afford more risk, and then to preserve your capital when you're getting closer to retirement (typically less in stocks and more in bonds). While it's a helpful idea in theory, the "experts" who put these plans together operate under two gravely mistaken assumptions: that bonds are safer than stocks, and that bonds and stocks move in opposite directions. We'll cover more on that later.

Myth #7: Annuities are bad. Conventional wisdom will tell you that annuities as an investment class are overpriced and a bad investment. While this is true in general (largely due to exorbitant fees that are even worse than mutual funds), it would be unwise to paint this entire investment class with the same brush. At least one type of annuity (the tax-free fixed indexed annuity) is an invaluable investment tool. We'll revisit that soon, as well. (Side note: If you already own a bad investment like a variable rate annuity, ask your advisor about using a feature called a 1035 exchange to switch it for a good annuity without having to pay taxes.)

Myth #8: You have to take big risks to get big returns. One of the most important rules of investing is to risk a little for the potential to make a lot. Some easy ways for the individual to do this are structured notes, market-linked CDs, and fixed indexed annuities, which all share the common feature of protecting your invested principle but also giving you access to upside potential if the market moves the right way.

Myth #9: Success is determined by something beyond our control. We take a detour here for some more classic Tony Robbins psychology, applied to money: a change in mindset is necessary to succeed. With these myths busted, you don't have any excuse not to turn around your financial life for the better.

Section 3: What's the Price of Your Dreams: Make the Game Winnable


The book continues with the contention that no one actually wants money; rather, we all want what money can provide. Precisely what is sought is different for everyone, but it all falls under the six basic human needs of certainty/comfort, uncertainty/variety, significance, love/connection, growth, and contribution. Though money is an essential part of our lives, by knowing what it is that you're really after, you'll have better clarity about how to get where you want to go.

Once you know where you want to go, you can calculate a precise number, which will probably turn out to be less than you think. For example, if one of your wilder dreams is to buy your own private jet, it will cost you about $65 million, plus fuel, maintenance, crew wages, etc. Instead, you could just charter someone else's private jet - it will cost you about $5,000/hour to rent the same jet, or $500,000/year if you use it for 100 hours. Even with a seemingly unreasonable goal like a private jet, you can often get what you want for a fraction of the money you thought you'd need. Define what you want from the money, rather than the money itself, and you'll realize that your own goals are more achievable than you thought.

To do even better at defining what you want from money, Tony suggests you establish and calculate a series of five goals. By having different levels of financial success to aim for, your goals will become significantly more achievable and motivating. (For more on this, read Think and Grow Rich by Napoleon Hill for the manifesto on priming yourself to become rich.)

1. Financial security. If you can save enough so that the monthly returns on your investment portfolio will pay for your monthly housing, food, utilities, transportation, and insurance, you've covered 65% of the average American's monthly costs. If you hit this mark, you can choose a job you love instead of the high-paying one you hate. You could launch the startup you've been dreaming about, or take any number of "risks" that you wanted to take but couldn't because you didn't have enough in the bank to feel safe taking them.

2. Financial vitality. If you can also save enough to cover half of your monthly clothing, entertainment, and "small luxury" costs (golf dues, manicures, etc. - whatever makes you happy), you've reached the halfway point to truly never having to work again.

3. Financial independence. Add the rest of your necessary living expenses (which shouldn't be too much more), and you have what you need to never have to work again.

4. Financial freedom. Add the monthly payments for two or three significant luxuries (boat, vacation home, exotic car, etc.) to your number.

5. Absolute financial freedom. Now dream big - what do you need (things/experiences, not their dollar values) to have everything you want? This is where you find your limits - and they might surprise you. If you're honest with yourself, there is no way that something ridiculous like a private skyscraper coated in gold is something you actually want. There is no way that it would give you enough happiness to be worth the time it would take to actually get it, or the other things that an equivalent amount of money could get you. It would also probably be less fulfilling than you think it would, especially if you already have all kinds of other luxuries. On top of that, you would probably feel a bit guilty using $1 billion for something along those lines, when that amount of money could feed 100 million hungry children for a year.

Remember, the goal is to achieve what you actually want from money, not the money itself. If you actually sit down and calculate the number, you'll probably realize that it's a lot less than what you thought - probably around $500,000 - $5 million of annual income. That might never be within reach, but once you know the upper limit of what you want, you'll realize how happy you can be just by getting close.

Now that you've taken the time to write down what would actually make you happy, you can revisit some life choices that you made on autopilot, thinking you wanted them only to realize that they aren't really making you happy enough to justify their cost. The act of going through this exercise, together with the motivation provided by the five concrete goals listed above, may help you save more, earn more, reduce fees and taxes, get better returns, or change your lifestyle in other ways - by moving to a cheaper geographic location, for example.

An easy way to go through this exercise is to use the app at the link here.

Section 4: Make the Most Important Investment Decision of Your Life


In a word, the most important investment decision is allocation. Tony goes through a long list of the characteristics of different investment options, but since these are readily available elsewhere, I'll gloss over this portion of the book. Tony advocates a division of your assets into security, risk/growth, and "dream" buckets to provide a balance of asset protection, asset growth, and emotional juice to keep you going.

Section 5: Upside Without the Downside: Create a Lifetime Income Plan


Tony's pièce de résistance comes here: a peek into the portfolio allocation of Ray Dalio, who is possibly the greatest investor in history. (Ray isn't taking new investors right now, and when he was, you needed a minimum of $100 million to invest with him and get access to his knowledge. Tony got it for free and included it in the book, which is pretty cool.) A core belief underlying this allocation is that market prices reflect all known information - at least to the extent that normal people would be able to tell. As a result, the only way prices move is when there is a surprise. The only two ways that overall market prices move are unexpected inflation/deflation and economic growth. (Overall market prices are what matters if you're properly diversified within each asset category.) It's easier to visualize with this chart:

Money-Master-the-Game-1

Tony and Ray were also good enough to include a chart showing which types of investments do well when each kind of surprise happens.

Money-Master-the-Game-2

The point of portfolio diversification is to be invested in different asset classes so that when one class drops, the other class rises, and your investment is protected. Most people, including most financial professionals, use the allocation of about 50% stocks, 50% bonds as a benchmark for their allocation. (There is also typically a small portion allocated to U.S. Treasuries, gold, and other so-called "low-risk" investments.) The allocation of stocks vs. bonds is supposed to be weighted more in favor of stocks if you want more risk and more return, and weighted more in favor of bonds if you want less risk, such as when you are nearing retirement. This widely accepted approach operates on the two mistaken assumptions discussed in Section 2: that bonds are safer than stocks, and that bonds and stocks move in opposite directions. As you can see in the chart above, it is a bit more complex than that.

Here is where things get difficult to follow if you're not a finance expert, so you might have to read the next paragraph twice.

When you diversify your investment portfolio, the point is to diversify your risk, which in the context of investment is just another word for variability. Different asset classes (stocks and bonds, for example), have different levels of variability. Therefore, since stocks are riskier (more variable) than bonds, if you want a balanced portfolio where the risk is equal on both sides, you have to have more bonds than stocks. It is the risk you are balancing, not the assets attached to the risk. If you follow this logic, you will understand that the traditional method of allocation (i.e. by percentages of assets, rather than risks) is completely nonsensical. It's measuring apples in order to find out how many oranges you need.

When you match the direction each asset class moves in each type of market situation with the relative risk/variability of each of those asset classes, you get a portfolio, courtesy of Ray Dalio, that looks more like this:

With this portfolio over the past 30 years, you would have solidly beat the market (9.72% annual return, net of fees), and the worst annual loss you would have seen was 3.93% in 2008 (when the market was down 37%). You would have only lost money in four of those 30 years. The 30 year period is most relevant, but if you want to go back 75 years, only ten years were losing years, and your worst loss is still the 3.93%. In contrast, the market was negative 18 times, and the largest loss was 43.3%.

By structuring a portfolio the right way, you've done the impossible by consistently beating the market in both risk and return. You can adjust the portfolio to fit your own needs, but there is no better benchmark.

After dropping that bombshell, Tony goes on to point out that growing your investments is only half the battle. You'll need to know what to do going down the mountain - when you've grown your assets sufficiently to attain the lifestyle you want, and it's time to simultaneously preserve and enjoy what you have. Traditional low-risk investments like treasuries and CDs are horrible ways to protect your capital due to abysmally low returns. On top of that, it's highly likely that advances in medicine will soon increase your expected lifespan far beyond the ~80-year mark, meaning that the old math of a ~15-year retirement won't work.

(For more on the likelihood of substantially increased lifespans in the near future, read The Fantastic Voyage by Ray Kurzweil and Ending Aging by Aubrey de Grey.)

For these reasons, Tony loves fixed indexed annuities, which provide complete protection of your capital (no downside) with the ability to also enjoy market gains. "Complete protection" really does mean complete protection. In the U.S., each state has FDIC-style protection for insurance companies, ranging from $300,000 - $500,000. If your insurance company goes bust, the state will guarantee your capital. (This is incredibly rare, by the way - while 140 banks went under in 2009 alone, not a single insurance company closed its doors.) Unless there is a zombie apocalypse, you're safe. FIAs also give you no tax on the growth of your capital, a guaranteed lifetime income stream, tax-free withdrawals, and zero management fees. Make sure to use an advisor who knows how to structure the FIA correctly and add the proper riders to get all these benefits.

Tony also touches on private placement life insurance (PPLI), which allows unlimited deposits, no tax on the growth of your capital, no tax on withdrawals, and no inheritance tax. Basically, you're using an insurance policy to shield your capital, then taking free "loans" out of the policy whenever you want without having to pay them back. This is nothing like regular life insurance, which is almost always a bad investment.

The catch is that PPLI can only be purchased by accredited investors ($200,000 annual income or $1,000,000 net worth), but TIAA-CREF has a version of PPLI that anyone can access. Tony refers us to TIAA-CREF's or Stronghold Financial's websites to take advantage of this tool.

Section 6: Invest like the .001%: The Billionaire's Playbook


Because Tony wrote this book based on the interviews in this section, there isn't much specific new information here. However, given that the people interviewed are the top names in investing, it might be worth getting the book just to read through the interviews and understand their perspectives.

Section 7: Just Do It, Enjoy It, and Share It!


Tony steps away from the focus on money to wrap up the book by revisiting how money is just a part of a good life. The three decisions of what you focus on, what your life means, and what you're going to do will shape your life, and money is simply an enabler of focus, meaning, and action. Money allows you to invest in experiences, buy time for yourself, and give to others. Using money for growth and contribution will give you a happier and healthier life.

Conclusion

Most of the contents of this book have been said elsewhere before, but Tony's contribution is invaluable in calling out truths that are regularly forgotten by the professionals and misunderstood by the general public. Its 600+ pages do contain quite a lot of motivational fluff, but coming from the master of motivation himself, maybe it's worth the time. Either way, this book is the best guide to investing in the public markets that I've seen.

Money: Master the Game on Amazon

Comments (26)

 
Dec 23, 2014 - 1:28pm

Haha, no. I have plenty of clickthroughs, but the conversion rate tends to be very low, and it's less than a dollar per conversion. I doubt that the affiliate links will ever even cover my hosting costs. The plan is to monetize by adding other content once I've built up a large database of the book summaries. If you're interested in learning how to monetize blogs, I would recommend the website "I Will Teach You to Be Rich" from Ramit Sethi.

http://www.deconstructingexcellence.com/
 
Dec 23, 2014 - 6:12pm

I'm about halfway through it and plan on reading more during my flight tonight. Its interesting, but he definitely does his typical Tony b.s. where he talks a lot. I got through the first 15% and realized all I had read was about what he was going to tell me throughout the rest of the book. I'm looking forward to reading about some of the investor's thought processes.

I actually attended one of his private conferences and there's no doubt he's very impressive in person. Chills the room and makes everyone jump on trampolines. Hilarious. He has this way of energizing you and making you think bigger / outside the box. If we all attended one of those conferences twice a year or every quarter, we'd be a lot more productive and inspired, no doubt.

 
Dec 23, 2014 - 6:19pm

Have you read any Napoleon Hill books? How about The Alchemist? What are your thoughts on "The Secret?"

Really enjoyed Think and Grow Rich and The Master Key to Riches by Napoleon Hill.

twitter: @StoicTrader1 instagram: @StoicTrader1
 
Dec 23, 2014 - 8:10pm

I've read Think and Grow Rich, but my experience with these types of books is that if you read the writer's magnum opus, you won't get nearly as much utility out of his/her other books. I might read his others at some point. Think and Grow Rich was extremely valuable, and in staying with the money/wealth theme, I'm making that my next summary.

While I know The Alchemist has been one of the best-selling books of all time, people I trust have told me it's usefulness doesn't live up to the hype. I suppose what you get out of a book depends a lot on who you are and where you are in life, so it might be different for different people. It's on my list to read, but not a priority.

I don't plan on ever reading The Secret; while there is merit to the core principles of gratitude and visualization, by simply reading the Amazon and Wikipedia summaries, I can tell it's way off base.

In general, I tend to avoid self-help books in favor of books that either expose a misconception that I have (e.g., Malcolm Gladwell) or give me some practical technique I can apply to my life (e.g., the Checklist Manifesto). I will make an exception and read books that seem to fall in the self-help category only if recommended by someone I trust, because most of them are based on a philosophy with which I strongly disagree.

http://www.deconstructingexcellence.com/
 
Dec 23, 2014 - 10:11pm

Looks like a good read overall, but not sure I understand the negative comments on 401(k)'s. My employer 401(k) has very low fees, a variety of investment options including several index funds, and an employer match of 4% of my pay.

401(k)'s also have tax advantages in that you defer paying taxes on your income until you withdraw the money in retirement. The Roth is great and definitely superior for a young person, but the max investment for a Roth is $5,500 per year which is nowhere near enough to save, so the best approach is investing in both a Roth and employer 401(k). Plus, you'd be a fool to pass up on your employer match since it's free money. Not sure if he is just referencing certain companies that have high fees and limited investment options, but I haven't seen that issue in my experience..

 
Dec 23, 2014 - 11:04pm

Most large firms have Roth 401k plans now where employees can get the tax benefits of a Roth with employee matching, without the income limits of Roth IRAs, which were insanely low the last time I checked in 2008. Also, I agree that most big firms have ridiculously low cost investments available in their 401k plans.

On a separate note, one beneficial regulation would be that employers should not be able to offer company stock in their 401k plans. Unfortunately, too many employees drink the company Kool-Aid and don't realize the risk they are taking by doubling down their career and investment risk by investing their retirement funds in their own company's stock. That's something I wish we never did at Lehman.

 
Dec 24, 2014 - 5:04pm

Tony discusses this at well, but I skipped over that part. I don't know if I would personally support a ban on offering company stock; I think that it is a positive think to give the rank-and-file employees equity in the company, both to motivate loyalty and reward performance, and simply as a way of extending respect to the average employee. However, I do think that touting company stock as a significant part of a retirement portfolio without explaining how seriously it would violate portfolio theory is a deceptive practice. Perhaps company stock should be offered outside of a retirement portfolio, but this would block employees from utilizing the tax advantages of a retirement portfolio.

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Dec 24, 2014 - 4:53pm

Did you put your 401(k) into the fee checker? One of Tony's points is that many people think their 401(k)'s have low fees, and don't realize how many hidden fees there are. Of course, it's entirely possible your employer does actually give you access to some great investment options. If so, your company is the exception to the rule based on Tony's experience, and mine as well.

The 4% match you get seems pretty generous, so it's great that you're getting that much. However, the generally accepted conclusion that you'd be a fool not to take advantage of any company match is incorrect. If your company only allows you access to high-fee mutual funds, your match might be completely negated by the additional fees.

I think there might be some confusion about the terms IRA, 401(k), and Roth. The IRA and 401(k) are the two types of retirement savings accounts, with the IRA being personal and having low contribution limits ($5.5k for 2015 still) and the 401(k) usually being through an employer and having higher contribution limits ($18k for 2015).

The term "Roth" refers to the tax treatment of a retirement account - so you could have both a Roth IRA and a Roth 401(k). If your company has a match, then your best option is to start with the 401(k) until you reach the match limits... unless your company's 401(k) doesn't offer low-cost index funds, in which case you need to evaluate the extent of the fees you're paying for the investments in your 401(k) against the company match, and determine whether it's worth it. Either way, it's a shame if your company won't let you invest in low-cost index funds, so Tony's point (which I agree with) is to ask your employer to offer them as investments if they aren't already offered.

http://www.deconstructingexcellence.com/
 
Dec 24, 2014 - 8:24pm

Deconstructing Excellence:

Did you put your 401(k) into the fee checker? One of Tony's points is that many people think their 401(k)'s have low fees, and don't realize how many hidden fees there are. Of course, it's entirely possible your employer does actually give you access to some great investment options. If so, your company is the exception to the rule based on Tony's experience, and mine as well.

The 4% match you get seems pretty generous, so it's great that you're getting that much. However, the generally accepted conclusion that you'd be a fool not to take advantage of any company match is incorrect. If your company only allows you access to high-fee mutual funds, your match might be completely negated by the additional fees.

I think there might be some confusion about the terms IRA, 401(k), and Roth. The IRA and 401(k) are the two types of retirement savings accounts, with the IRA being personal and having low contribution limits ($5.5k for 2015 still) and the 401(k) usually being through an employer and having higher contribution limits ($18k for 2015).

The term "Roth" refers to the tax treatment of a retirement account - so you could have both a Roth IRA and a Roth 401(k). If your company has a match, then your best option is to start with the 401(k) until you reach the match limits... unless your company's 401(k) doesn't offer low-cost index funds, in which case you need to evaluate the extent of the fees you're paying for the investments in your 401(k) against the company match, and determine whether it's worth it. Either way, it's a shame if your company won't let you invest in low-cost index funds, so Tony's point (which I agree with) is to ask your employer to offer them as investments if they aren't already offered.

Disagree with your comment on the company match. If you are making $100k per year and your company offers a 4% match, that is $4k of free money the company is offering to give you every year. Even if only actively managed funds are offered in the 401k plan, getting $4k of free money with a 2% mutual fund fee is better than getting zero.

The Roth is great, but I believe it is best to have a combination of both pre tax and after tax savings. Generally the Roth is superior if you expect your tax rate to be higher in retirement and the 401k is best if you'll be in a lower tax bracket in retirement. so you reduce risk and are more diversified by investing in both.

 
Dec 23, 2014 - 10:57pm

Levering a risk-weighted portfolio works great in a secular bull market like we've had for the past thirty plus years. When the ten-year Treasury has a two-handle? Expect less compelling results going forward than experienced previously.

 
Dec 24, 2014 - 4:58pm

The point of Ray Dalio's allocation is to perform equally well in bear and bull markets, and in inflationary and low-inflation environments. The allocation isn't precise, and I'm sure what he's using now is being adjusted for currently expected future market conditions, but it's a much better starting point than the 50/50 stock/bonds split that most inexperienced investors have been sold on. In the past 70 years, we've experienced every type of market condition that can be experienced, so I don't think the results of the portfolio will change much.

http://www.deconstructingexcellence.com/
 
Dec 24, 2014 - 6:57pm

Deconstructing Excellence:

The point of Ray Dalio's allocation is to perform equally well in bear and bull markets, and in inflationary and low-inflation environments. The allocation isn't precise, and I'm sure what he's using now is being adjusted for currently expected future market conditions, but it's a much better starting point than the 50/50 stock/bonds split that most inexperienced investors have been sold on. In the past 70 years, we've experienced every type of market condition that can be experienced, so I don't think the results of the portfolio will change much.

Agree to disagree that we have experienced every type of market condition that can be experienced.

When interest rates are this low, it is almost a certainty that this type of portfolio won't do as well as historically. I doubt Dalio would argue that. That type of portfolio benefits massively from a bond bull market. Current yield to worst figures are a reasonable proxy for expected returns going forward in bonds. They are really low and much lower than historical averages.

 
Dec 26, 2014 - 2:05pm

For obvious reasons in a ZIRP environment being long bonds and growing yield is generally how you want to be 'weighted'. The important thing is where do you think interest rates are going to go from here? Short term you might get below 1.7 on the tens but long term, expect much higher and that doesn't bode well for your hypothetical weighting. Which is what @"DickFuld" is saying, your portfolio is hinging on prolonged lower rates from already very low levels. That isn't a bet you should be willing to take.

The comments on knowing your goals and deciding what's reasonable attainable are good and generally absent from most people's line of thinking. I still think that dividend investor site I posted awhile back is the best starting point - note starting, not necessarily ending point - either way it isn't a simple portfolio allocation that will get you your long term goals.

Take gold for instance, the last bull market in gold was followed by decades of stagnation, which is basically what you're seeing now since 2011. The biggest "bull case" for the metal is rising production costs being transferred to the consumer, but that implies fair value is the average producer break-even + X% growing production costs. I'm also unsure how you intend on investing in corn or other commodities, so 15% of your hypothetical portfolio will be subject to high volatility and stagnation, 55% in interest rate sensitive securities and 30% in stocks which are currently making all time highs and high earnings. Supposedly, small caps are pricing in negative returns over a 10yr time frame absent economic growth in excess of 3%, I'm not sure I agree with that outlook but hopefully I've made my point...

 
Dec 26, 2014 - 9:22pm

Sure, I get your point. I think that Ray's point is that for the nonprofessional investor, all these things are all priced into the market, and even a professional investor can't consistently predict when and if any of these factors will change. Therefore, a nonprofessional investor shouldn't even try to play that game, and should just do his best to balance all those risks in the right directions. Given Ray's track record, I'm willing to trust his math on this.

http://www.deconstructingexcellence.com/
 
Dec 26, 2014 - 9:42pm

Deconstructing Excellence:

Sure, I get your point. Given Ray's track record, I'm willing to trust his math on this.

I don't think you get my point. My point is that the underlying fundamentals which justify that portfolio weighting are based on dynamics that no longer exist in the current environment of very low interest rates, very high equity valuations and stagnate gold.

What math are you referring to? You don't need to be a quant to figure out whether historically low interest rates are more likely to rise over the long term or continue lower for a prolonged period of time.

Deconstructing Excellence:

even a professional investor can't consistently predict when and if any of these factors will change. Therefore, a nonprofessional investor shouldn't even try to play that game, and should just do his best to balance all those risks in the right directions.

Maybe I'm misunderstanding the finer points of your post, but are you suggesting "it's all just a crap shoot, so just average in?"

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