Book Notes: Money: Master the Game

Money: Master the Game by Tony Robbins is a helpful book in how to manage your investment portfolio and save for retirement. It provides a combination of good advice, common knowledge and some questionable endorsements. Overall it was a long but very informative read that gives one a lot of useful considerations to think about when handling your finances.

What is the Power of Compound Interest?

• Compound Interest is super powerful. Earning potential via income is much weaker than people realize.
• Many finance books such as The Richest Man in Babylon, Rich Dad Poor Dad, and this book all suggest “Paying Yourself First”.
  
  • Prioritize saving money for yourself before paying any of your other bills.
  • This ensures you are taking advantage of compound interest and not missing out on growing your investments over time
  • After paying yourself first, by using the remaining cash to pay your bills, you force your remaining budget and spending to fit, rather than forcing your savings to fit into your budget.
  • It is suggested in this book to save 10-15% of your income. But if that is not possible, save what you can. Use anything extra you get from raises over time to fill the remaining gap to get to this 10-15%.
• There are two ways investment companies measure returns: dollar-weighted returns and time-weighted returns. Dollar-weighted returns are a more reliable measure than time-weighted returns.
  
  • Dollar weighted returns will provide you with returns based on the weighting of dollars you’ve invested (or withdrawn) with an institution.
  • Time-weighted returns will weight the return you get over time, which is skewed because the amount of cash that is put in or taken out of an investment is not factored into the return calculation.
    

What are the Different Types of Asset Classes?

• Safe Assets:
  
  • Cash/Cash Equivalents – Money Markets or online savings accounts. US Treasury Money Market funds are a good option
  • Bonds – TIPS (Treasury Inflation-Protected Securities) are good examples (Treasuries vs TIPS together hedge against deflation and inflation)
  • Market-Linked CDs
  • Home – adjusted for inflation, return is fairly flat
  • Pension
  • Annuities
  • Life Insurance – term life or even income life insurance
  • Other Bonds if you research thoroughly and find it very safe
• Riskier Assets
  
  • Equities and ETFs
  • High-Yield Bonds (Junk Bonds)
  • Real Estate (the book suggests Senior Housing and REITs are good options)
  • Commodities (gold, silver, etc.)
  • Currencies
  • Collectibles
    

What are the Best Things to Invest In?

• Most financial advice suggests buying into market indices like the S&P 500 instead of mutual funds.
  
  • It is extremely rare for fund managers to consistently outperform the market, yet fund managers charge management fees and brokerage charges within the fund in exchange for sub-par returns.
  • Rich Dad Poor Dad has a different view here, and considers these index investments to be “sanitized” and won’t get you ahead. Instead, Rich Dad Poor Dad suggests acquiring assets you love: make investments in areas where you are an expert in and understand very well.
  • I think you need to balance your safe bets and your riskier ones when considering what your ideal portfolio diversification should be.
• Fixed Index Annuities are annuities that provide 100% principle protection yet enjoy gains when the market goes up. You pay into it and start receiving annuity payments whenever you choose to.
  
  • It seems at the time of this book’s writing, these instruments were being developed, but were never made available. So while this seems like a great product in theory, not sure if this is real or even doable.
• Structured notes are loans to a bank where gains from the market are gained, but the principle is almost guaranteed. Normally reserved for the wealthy, but Registered Investment Advisors can often access these.
• Per Paul Tudor Jones, you never want to be a contrarian investor. Go with the trend.
  
  • Going with the trend will work in your favor, you’ll gain like most others.
  • Going against the trend can present an oversized risk, and most don’t have the resources to spot hidden opportunities that others have missed.
• Many investment philosophies suggest paying attention to a company’s leadership before investing. Warren Buffett looks to invest in good leadership within a company, whereas Carl Icahn, as an activist investor, will often look to get on companies’ boards to ensure good leadership is installed.
  

What Portfolio Diversification Does this Book Recommend?

• Recommended portfolio diversification/asset allocation by Ray Dalio, founder of Bridgewater
• The Traditional idea of a balanced portfolio isn’t balanced at all. Ex: if you are 50% in Stocks and 50% in bonds, Stocks are substantially more volatile than bonds. If your stocks tank, your whole portfolio tanks, simply because of how volatile that portion of your portfolio is.
• Only four different things change the price of assets:
  
  1. Inflation
  2. Deflation
  3. Economic growth
  4. Economic downturn
• What is the recommended diversification?
  
  • 30% in stocks like the S&P 500 or other indices
  • 15% in intermediate-term 7–10 year treasuries
  • 40% in long-term bonds 20–25 year treasuries
  • 7.5% in gold
  • 7.5% in commodities
• This diversification is intended to hedge against the above four different things that can lower the price of assets—thus you limit your downside without sacrificing too much upside that you get from being invested in the stock market.
  

How Do I Time Making an Investment?

• Lump-sum investing can be better when markets go up continually but Dollar Cost Averaging is better when markets fluctuate. Deciding on which to do depends on your risk tolerance.
  
  • Safer bet is likely just to stick with Dollar Cost Averaging since it’s often easier than lump sum (former can be automated) and limits the downside since there are often fluctuations.
• Periodically rebalancing your portfolio across asset classes is important as sometimes one portion of your portfolio can grow a lot larger than the rest, and you then have a larger portion in a risky bucket. So, you need to rebalance to mitigate risk.
  
  • Rebalance around once or twice a year.
• Be aware of tax implications for selling assets that you’ve owned for less than a year. Fiduciary advisors can help you with structuring those sales.
• Per John Templeton, the time to sell an asset is when you think you have found an asset that you think is a 50% better bargain than the current asset you own.
  

Who Can Help You with Your Portfolio?

• Certified Financial Advisors (CFAs), also known as Registered Investment Advisors (RIAs) have a fiduciary obligation to give you good advice on investments and manage your portfolio.
• Only fees RIAs should charge are Assets Under Management and nothing else. Otherwise, that suggests they have other incentives. They shouldn’t have any affiliations with brokerages or charge fees for trades.
• Your money should be stored with someone else (ex Schwab) not the RIA themselves, otherwise, this may create a conflict of interest
• RIA fees should ideally be 1.25% of Assets Under Management or less. This advisory fee should be tax-deductible.
  

Why is Managing your Tax Liability Important?

• If you double your money every year for 20 years starting with $1, you’d end up with about 1.04M. When you include a 33% tax rate, you end up with only 28k. So learning how to manage your tax liability is critical.
• PPLI — Private Placement Life Insurance
  
  • Removes your investments from the tax system entirely
  • Insurance wrapper around investments, and you may be able to withdraw early as a “loan”, that way, you avoid all tax liabilities. When you die, your heirs can still access tax-free the remaining balance, minus the “loan”.
  • TIAA CREF has products like this for anyone, Registered Investment Advisor can help structure this.
    

What are Other Ways You Can Manage Your Finances?

• Pay next month’s mortgage principle this month, which will reduce your mortgage duration by 15 years
  
  • I think this depends on how long you plan to own your house. You’re saving very little on interest expense if you only live in your house for a few short years. And 3-5% mortgage interest is low compared to the returns you can get in the market.
• You can improve your cost of living by moving to a different geographic location
• Living Trust: Protects your family. A Will is also important but a Living Trust avoids lengthy and expensive probate procedures.
  

How Can You Make Yourself More Marketable and Invest in Yourself?

• Learn to work harder on yourself than you do on your job.
• All you need to earn more money in the same amount of time is to become more valuable.
• Retool yourself according to what the market is demanding.