Feature image by Miguel Bruna
What follows are the lessons I’ve learned about investing from studying Tony Robbin’s book Unshakeable. All credit goes to Tony and I recommend you all go out and get a copy.
I’m studying this because investing is part of my plan for success. I’m sharing it to help those who were like me; people who dream of achieving great success but are unaware or too scared to risk seeking the financial rewards of investing.
My goal is to become unshakeable and to achieve the level of confidence that will allow me to be master of my financial, physical and emotional life.
What does unshakeable mean?
Unshakeable means having the power to stay in control when you are faced with fear and doubt.
(To learn more about the concept of unshakeable in investing and life Read Part 1 here.)
The Basic Concept of being Unshakeable in the market:
To put it in the same metaphorical terms that Tony does, it’s to know that winter is coming, there will be bad times, but after winter comes spring. It’s to know that the market is cyclical and that what goes up will come down, and it will go back up again.
So if you put your money into good, safe investments, then there’s no need to panic. In the long run the trend has always been up. Humans aren’t going out of business anytime soon. So the winning strategy is to buy good, play long, and avoid the fear that gets others to throw away their money.
Other key lessons that are part of being unshakeable regard having the knowledge to take control. If you know the real situation and you know what the threats are, then you won’t be shaken by them. You can prepare for them and even take measures to advantage from bad situations.
One vital area of knowledge is financial literacy. If you know the financial system and the tax code, then you are aware of the pitfalls that are out to get you.
In the book, Tony spends a lot of time educating his readers about the dangers.
We don’t have time to cover them all here. But he offers great advice to help you ‘avoid the sharks’. Those things that will silently chew up your potential earnings from investing.
Pitfall 1: Funds:
His first big warning is about Mutual Funds. These funds are institutional investors who take people’s investment money and charge a fee to allocate their money for them. The big lesson is that these funds almost never beat the market and their fees are huge.
So, you are effectively paying large fees for pretty average advice and returns. You are much better to buy a safe index fund, a group of stocks that reflect a collection of stocks on the market. (For example an index fund which is simply a collection of all the stocks that make up the S&P 500) These funds have little to no fees and they are proven performers over the long term.
No one can successfully predict the movement of the market and the fees mutual and hedge funds charge will destroy your earnings.
Pitfall 2: Fear:
Fear is the other major pitfall that investors need to be aware of and they need to actively work to overcome.
Fear is what drives amateur investors to throw away all the advantages of investing. Overcome the fear and follow the rules to becoming an unshakeable investor.
How to defeat fear and become unshakeable as an investor.
In order to overcome fear, you need to have a system. You need to have a set of guiding principles that you trust. So even when the sky is falling, you know that you’ve done the right thing and you can have faith that in the long run you will come out on top.
This is how the great investors do it. They know there will come a time when their resolve is tested. They may not know what the market is doing. Or they may have a loss of confidence. Perhaps they are not sure about conflicting information.
In these cases, they rely on the lessons they have learned. From their lessons and experiences they develop principles that guide them. Principles they can trust will guide them safely through the unknowns of the market.
From his study of the greats, Tony offers four key principles to help guide our investments.
The Core Four
To guide investment decisions you need to know the principles.
This relates to all areas of life. In business and personal life, if you understand the principles and you stick to a smart game plan, then you can achieve success at anything.
As Tony states: “… the most successful people in any field aren’t just lucky. They have a different set of beliefs. They have a different strategy.” (Robbins P. 95)
So here are the core principles to follow in investing:
Core principle 1: Don’t lose Money
This sounds pretty straight forward. Investing is about making money. No one is actively trying to lose money. However, what happens is that many investors go into the market looking to make big returns fast. They are eager to win big, so they are more likely to take on big risk.
Also, beginner investors are more likely to follow trends. They will chop and change their investments. Often, they may take a small loss to sell so they can get into a more attractive investment. Meanwhile, accepting the fees and charges that go with a high buy/sell count on their investment account.
Furthermore, fearful beginning investors are also very susceptible to the fear of a correction and will cut and run when things turn bad. This is a bad loss, when many times they should hold on and wait for the rebound.
What experienced investors know is that risk means potential loss. And the best investors hate to lose money. For every loss you make, it becomes harder to get back. For example, a 50% loss is a big hit. But in order to get that back, you don’t need a 50% gain, you need a 100% gain to win it back.
So the first principle is, always guard against risk.
According to Ray Dalio, “… we should never forget: we have to design an asset allocation that ensures we’ll “still be ok,” even when we’re wrong.” (Robbins p.98)
To achieve this asset allocation is the key. This simple means having the right mix of different asset types to reduce your risks and maximize rewards. (Robbins p.99)
It means playing the long game and setting up an investment portfolio that will work for you even when everything is going wrong. A mix of investments that combine both slow and steady and the potential for quick gain. A combination of assets that move in different directions, so when one is down, another is up.
We will cover asset allocation at a later date. But the overall lesson is that professional investors aren’t looking for one off big wins. They are looking to build a money making machine that will minimise risk and maximise rewards.
My wife and I have learned these lessons and we are starting to put together our own portfolio with a varied asset allocation.
It’s not fast and at times it is frustrating. But we know if we want the big long term rewards, we need to start small and start with safe. We can build on that to get to more returns when we have a solid foundation.
Core Principle 2: Asymmetrical Risk/Reward
The second principle shows us that the rewards must outweigh the risk. Your asset allocation must be balanced, so that your winning investments easily make up for any losing investments.
We know that we can’t win all the time. However, we also know we can’t lose all the time.
So when we do take on risk, that risk needs to be balanced against our other investments.
Also, the risk needs to be worth it. If you risk one dollar to make 10c, a 10% return, you’re risking it all for a low return. If you have five investments of one dollar, all looking to make 10c, then your potential return is 50c.
However, if one of your investments loses, then you only get 40c. Also, you lose the dollar you put down. So that leaves you with $4.40, less than the original $5.
This is a very simple explanation, and obviously misses much of the complexity of the market. The point is, if you are going to take on risk it needs to be worth it and it needs to be balanced against all the rest.
Here, Tony quotes Paul Tudor Jones to illustrate his strategy of a five-to-one rule. He argues that he doesn’t risk a dollar unless the reward is potentially five dollars:
“I’m risking one dollar in the expectation that I’ll make five … What five-to-one does is allow you to have a hit ratio of 20%. I can actually be a compete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.” (Robbins P. 101)
I feel this is a little beyond me at the moment.
We’ve just started to invest our money and we’re still taking it very safe and building slow, safe stocks and looking to diversify this year into land.
However, I see the strategy going forward. As we have established our safe portfolio we will look to improve our returns by taking on some more risky investments. And this does make sense as a good strategy.
Don’t risk it unless the reward is worth it. If you are going to risk it, balance that risk against other options so even if you’re wrong, the one time you’re right will make up for it.
Core principle 3: Tax Efficiency
As investors, we need to acknowledge that taxes are an expense. They can take away a sizeable chunk of our earnings. Especially if you’re a high earner, that chunk can be rather sizeable.
Investors know: “They know that it’s not what they earn that counts. It’s what they keep.” (Robbins p.105)
So, for every investment, we as investors need to ask, what is the tax expense?
- Is this investment worth it given the tax expense?
- How can we minimise the taxes on our investments?
- How can this tax expense effect (positively and negatively) our portfolio of investments?
Now, I’m not an expert on tax. It’s not something I’ve studied or even really given a lot of thought too, beyond complaining about it and hoping my tax return is good.
At the moment, tax isn’t a big problem for our small portfolio. However, having learnt our lessons, we are aware of the fees and taxes we pay and it’s a question we ask before we make any changes.
Going forward, it’s an area we need to put time into, or we need to be prepared to hire an expert.
Either way, it’s something we need to be aware of and we need to take into account with ever investment we make.
Core principle 4: Diversification
Diversification is how you reduce risk. We all know that every investment has risk. That’s why you get a reward. You get a cash reward because you are risking your money in the public, sometimes dangerous, open market. By spreading your money around to different investments, you reduce the risk that you could lose it all by having it all in the one place.
To become fully diversified you need to do four things:
1) Diversify across classes – for example buying not just stocks, but buying stocks, bonds, futures, currencies, gold etc.
2) Diversify within classes – don’t just buy one stock or type of stock. You need a variety of stocks.
3) Diversify across markets, countries and currencies around the world. Don’t invest all your money in one market and one country. By sharing it among different markets and countries, you reduce your risk. If one country is effected by a tragic occurrence, you are not so badly at risk as you have an allocation of assets in another unaffected area.
4) Diversify across time – You are never going to get the timing perfect, but over months and years across different classes you average out the risk/reward. This is called dollar-cost averaging, which basically means, sometimes you get it right and some times you get it wrong, but it all averages out over time. And as the overall trend is generally up, you’ll usually end up going in the right direction.
Diversification is the Key:
Diversification is your insurance policy. One day you may face a big loss. By having diversity in your investments, it allows you to react as assets respond differently to market actions.
“Ray [Dalio] emphasizes that, by owning 15 uncorrelated investments, you can reduce your overall risk “by about 80%,” and “you’ll increase the return-to-risk ratio by a factor of five. So, your return is five times greater by reducing risk.”” (Robbins P.112)
Final Investing Lessons:
To be unshakeable in what is essentially a risky market, you need to have tried and true principles to guide your actions.
If you follow the proper guiding principles, you can be confident that no single big hit will sink your financial goals.
You will be prepared for the dangers and you won’t react emotionally to what are actually logical and financial problems. You will be able to react with intelligence and save yourself from the pitfalls of investing.
Beyond that, if you follow the principle of good investing, you set up a money machine that has the strength and flexibility to respond to negative situations and to keep making you a return.
By creating your asset allocation portfolio, you have the power to make strategic decisions at times of worry. For example, shares drop and you worry your value is falling. But if you have assets over different classes, this worry becomes a simple calculation.
My shares are down, that means they’re cheap. Conversely, my negatively correlated assets, say bonds are likely up. So, by readjusting, I sell my high priced bonds and buy more cheap priced stocks and thus win in the conversion. It’s basic buy low, sell high.
Follow these principles and start building your cash machine today.
It’s your ticket to financial freedom, to living life on your terms and to being unshakeable.
Thanks for allowing me to share and remember to never stop striving to achieve your image of success.
Stay tuned next week for my last lessons from Tony’s Unshakeable.
If you liked these basic ideas on investing, please read more at How to Achieve Financial Freedom through Investing.