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Diversification is one of the most important aspects when deciding how to allocate your stock portfolio. Today’s wisdom comes from the book “Money, Master the Game“. The author, Tony Robbins interviews some of the brightest minds in finance. He explains that
According to the Wall Street Journal, “More than 90% of active managers underperformed their benchmark indexes over a 15-year period.
Moreover, actively managed funds charge management fees of about 1% a year. Thus, as a group, actively managed funds underperform index funds by their difference in costs.
If I have learned one thing from this book, it is to diversify your portfolio through ETFs. An Index fund or ETF tracks a benchmark like the S&P 500 or the Dow Jones.
In this book, Tony gets the biggest finance tycoons to divulge their financial strategy for investing.
Why I love Tony Robbins: He is a man on a mission to feed the world! Tony is a philanthropist at heart and he is donating 100% of the profits earned from this book!!!
Talk about a big hairy audacious goal! Tony feeds 100 million people a year. With the help of Feeding America, his goal is to serve a billion people over the next eight years.
John C Bogle:
As of the date of this writing, Vanguard has $5.1 trillion under management, and allows free trading of their own EFTs if you have an account with their company!
Uniquely, Vanguard is an exceptional company because they have a low-cost high volume business strategy. Moreover, many of their most popular funds charge investors less than 0.2% a year, while the average equity fund charges more than 1%.
John C Bogle’s Recommendation for a Diversified Personal Stock Portfolio:
- 60% in equities (meaning stocks/mutual funds/ETFs)
- 40% is split between a bond index fund and a nontaxable muni bond fund (50%/50%)
More than likely, since John is the “Father of the Index Fund” or ETF, I would make an educated guess that his equities are diversified amongst several ETFs.
We can all learn a bit from Warren Buffet and John C Bogle, as they are both minimalists.
Although John is a multi-millionaire many times over, he still flies in coach. It would be a bucket list dream come true if I ever got sat on a plane next to this financial icon!!
John C Bogle just released a 10th-anniversary edition of his book, “The Little Book of Common Sense Investing” that is now available on audibles.
In this book, he describes the simplest and most effective investment strategy for building wealth over the long-term.
It’s like Warren Buffett said:
“The stock market is a game of transferring money from the impatient to the patient. If you’re willing to hang in there and put a small amount of money in, there’s no one who can’t get financially free, as long as you diversify.
As a side note, Warren Buffet notoriously still lives in the same house that he bought in 1958. Today, it is worth an estimated $652,619.
What we can learn from Warren Buffet and John C Bogle is that investing starts by saving first!
Vanguard Exchange Traded Funds (ETFs):
Personally, I use Vanguard for my Roth IRA account. I practice what I preach, and believe in saving for my retirement.
I have been maxing out my Roth IRA every year ($5,500) since I was 25.
Interested in learning more about tax-advantaged accounts? Read “Roth IRA: How to Become a Millionaire by the Time You Retire!”
I will be a millionaire when I retire, will you??
Rule of Thumb: Invest Your Age in Bonds
Tony Robbins recommends owning your age in bonds.
Example: 100-Your age= percent you should own in stocks.
For example, if you are 30 years old, then your portfolio should be composed of 70% stocks and 30% bonds.
Experts recommend that investors should rebalance their portfolio each year.
This causes you to sell some assets when they are high (locking in your gains) and investing in things when they are low (meaning you have plenty of those shares when they go up in value).
Careful not to rebalance an asset that you have owned for less than 1 year, or else you get hit with the ordinary income tax rate instead of capital gains tax.
In “Money, Master the Game“, several market experts list their personal asset diversification strategies, which I share with you below:
Ray Dalio’s All Season Portfolio Recommendation (net worth of $17.7 billion):
- 30% stock or index funds
- 15% intermediate 7-10 year bonds
- 40% in long-term 20-25 year bonds
- 5% in gold
- 7.5% in commodities
David Swenson’s Portfolio Recommendation (20 billion in assets under management):
David Swenson is no newbie to the game of finance. He is the head investment officer of Yale’s endowment fund. He advises people to
Divide your money into five or six equal parts, and invest them into different asset classes.
- 20% domestic stock
- 20% international stock
- 10% emerging markets
- 20% REITs
- 15% long-term US treasuries
- 15% TIPs
Interested in reading more about stock portfolio strategies? Click here to read “Investing Strategies: Contrarian Versus The Crowd Consensus”.
As always, my biggest recommendation is to be a lifelong learner by investing in yourself.
To get a brief idea of what Tony Robbin’s book is about, watch this quick youtube summary by TridentLion below. A word of caution, it would be silly to think that you could gain all of the wisdom within this book through this 6-minute video.
Again, take the time and money to invest in yourself. This book is quite lengthy, which is why I highly recommend listening to it on Audibles.
The 10,000-foot Overview:
My father always said, “There are many ways to learn throughout life, all of which cost money. You can pay to learn or you can go through the-school-of-hard-knocks”.
The most difficult part of the learn-as-you-go through trial-and-error mentality is that you may not know what you should have done instead. You will be constantly blindsided by obstacles and a constant feeling of uncertainty.
Managing your finances is a huge part of the game-of-life. Whether you want to or not, you are a participant of this game and have to play.
Metaphor: Knowledge is like holding a light while walking around in a pitch black maze. Are you holding a candle or a spotlight?
Think of knowledge as a useful tool to help you get through this maze. The more you know, the better questions you will be able to ask.
With a spotlight, you may find a map that you would have otherwise missed if you were just holding a candle.
When you take the time to learn, you attain the knowledge and skills that will better equip you to get through this maze. The end of the maze is called financial freedom.
If you enjoyed this article or have any questions about asset allocation and stock market theory, post a comment below!
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