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