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SECTION I WEALTH: THE RULE BOOK
Power and Peace of Mind in a World of Uncertainty
We all dream of achieving that tremendous inner peace, that comfort, that independence, that freedom. In short, we all dream of being unshakeable.
But what does it really mean to be unshakeable? It’s not just a matter of money. It’s a state of mind. When you’re truly unshakeable, you have unwavering confidence even amidst the storm. It’s not that nothing upsets you. We can all get hooked. But you don’t stay there. Nothing rattles you for any length of time. This state of mind allows you to be a leader, not a follower. To be the chess player, not the chess piece.
If you’re struggling to make sense of the future of the global economy, join the club. You know we’re living in strange times when even the greatest financial minds admit to being confused.
Great financial minds
If you’re feeling stressed and confused, I understand. But let me tell you the good news: there are a few people who do have the answers—a few brilliant financial minds that have figured out how to make money in good times and bad.
One of the greatest lessons to learn from these money masters is that you don’t have to predict the future to win this game.
Here’s what you do have to do: you have to focus on what you can control, not on what you can’t. You can’t control where the economy is headed and whether the stock market will soar or plunge. But that doesn’t matter! The winners of the financial game know that they can’t control the future, either.
You need to learn the rules of the financial game, who the players are, what their agendas are, where you can get hurt, and how you can win. This knowledge can set you free.
The money masters
- Ray Dalio, the most successful hedge fund manager in history;
- Jack Bogle, the founder of Vanguard and the revered pioneer of index funds;
- Mary Callahan Erdoes, who oversees $2.4 trillion in assets at JPMorgan Chase & Co.;
- Boone Pickens, the billionaire oil tycoon;
- Carl Icahn, America’s most formidable “activist” investor;
- David Swensen, whose financial wizardry transformed Yale into one of the world’s wealthiest universities;
- John Paulson, a hedge fund manager who personally earned $4.9 billion in 2010; and
- Warren Buffett, the most celebrated investor ever to walk the earth.
Unshakeable will show you how these masters of the financial world prepare themselves—how they profit by anticipating winter instead of just reacting to it. As a result, you’ll be able to benefit from the very thing that harms those who are unprepared.
Seven Facts to Free You from the Fear of Corrections and Crashes
Our capacity for pattern recognition is the number one skill that can empower us to achieve financial prosperity. Once you recognize the patterns in the financial markets, you can adapt to them, utilize them, and profit from them.
The first pattern we need to recognize is one that Warren Buffett has harnessed to amass a fortune that now stands at $65 billion. What’s his secret? It’s simple, says Buffett: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
It’s a common misperception—this belief that, if your earned income is big enough, you’ll become financially free. But, we’ve all read stories about movie stars, musicians, and athletes who earned more money than God yet ended up broke because they didn’t know how to invest that income.
The awesome power of compounding is that over time this force can turn a modest sum of money into a massive fortune.
You’re never going to earn your way to financial freedom. The real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years. That’s how you become wealthy while you sleep. That’s how you achieve true financial freedom.
But how are you going to get there? First, you’ve got to save and invest—become an owner, not just a consumer. And the single best place to compound money over many years is in the stock market.
Where should I put my money?
In an era of compressed interest rates, you earn nothing when you keep your cash in a savings account. What about stocks? US stock prices—and valuations—have soared over the past seven and a half years, fueling fears that the market is bound to plunge.
When we look back at the stock market over an entire century, we discover this extraordinary fact: financial winter comes, on average, every year. Once you start to recognize long-term patterns like this, you can utilize them. You see that important aspects of the financial markets are much more predictable than you’d ever realized.
A key point to note: When any market falls by at least 10% from its peak, it’s called a correction. When a market falls by at least 20% from its peak, it’s called a bear market.
The Seven Facts:
- On average, corrections have occurred about once a year since 1900 – Historically, the average correction has lasted only 54 days—less than two months! In other words, most corrections are over almost before you know it. Not that scary, right?
- Less than 20% of all corrections turn into a bear market – if you panic and move into cash during a correction, you may well be doing so right before the market rebounds.
- Nobody can predict consistently whether the market will rise or fall
- The stock market rises over time despite many short-term setbacks – Despite a 14.2% average drop within each year, the US market ended up with a positive return in 27 of the last 36 years.
- Historically, bear markets have occurred every 3-5 years. But know that they don’t last for ever, on average, they last about a year.
- Bear markets become bull markets and pessimism becomes optimism – when the mood in the market is overwhelmingly bleak, superinvestors such as Buffett tend to view it as a positive sign that better times lie ahead.
- The greatest danger is being OUT of the market – If you stay in the market long enough, compounding works its magic, and you end up with a healthy return—even if your timing was hopelessly unlucky.
Hidden Fees and Half-Truths – How Wall Street Fools You into Overpaying for Underperformance
What most people really want, regardless of how much money they have today, is freedom. Freedom to do more of what they want, whenever they want, with whomever they want.
By minimizing fees, you’ll save years—or, more likely, decades—of retirement income.
When two people trade a stock, one must win and one must lose. If the stock goes up after you buy it, you win. But you’ve got to win by a big enough margin to cover those transaction costs.
If your stock goes up, you’ll also have to pay taxes on your profits when you sell the stock. For investors in an actively managed fund, this combination of hefty transaction costs and taxes is a silent killer, quietly eating away at the fund’s returns!
The largest expense in your life is taxes, and paying more than you need to pay is insane—especially when it’s absolutely avoidable!
Your profits could be slashed by 30% or more, unless you’re holding the fund inside a tax-deferred account such as an IRA (individual retirement account) or a 401(k) plan. Not surprisingly, fund companies don’t like to dwell on these tax issues, preferring to tout their pretax returns!
If the fund is held in a nontaxable account like a 401(k), you’re looking at total costs of 3.17% a year! If it’s in a taxable account, the total costs amount to a staggering 4.17% a year!
Seemingly tiny fees can mount up until you’ve lost almost two-thirds of what you would have had.
Who Can You Trust? Pulling Back the Curtain on the Tricks of the Trade
The more money you have, the more likely you are to seek out advice: 81% of people with more than $5 million have an advisor.
But how do you find an advisor you trust—and who deserves your trust?
Unfortunately, financial advisors work in a system that’s beyond their control—a system that has tremendously powerful financial incentives to focus on maximizing profits above all else. This is a system that richly rewards employees who put their employer’s interests first, their own interests second, and their clients’ interests a distant third.
90% of the roughly 310,000 financial advisors in America are actually just brokers. In other words, they’re paid to sell financial products to customers like you and me in return for a fee.
The odds of finding good advice improve dramatically if you steer clear of all brokers and work instead with independent advisors who have a fiduciary duty to put your interests first.
How do you pick one?
- First, check the advisors credentials.
- Ideally, if you’re getting an advisor, you should be getting more than just someone to design your investment strategy.
- Next, you want to make sure they have experience working with people just like you.
- It’s also important to make sure you and you’re advisor are aligned philosophically.
- It’s important to find an advisor you can relate to on a personal level.
A world-class advisor will help you immeasurably from start to finish: defining your goals, keeping you on a steady path toward them—in particular, by helping you to weather market volatility—and massively increasing the probability that you’ll actually achieve those goals.
Seven key questions to ask you advisor
- Are You a Registered Investment Advisor? If the answer is no, this advisor is a broker.
- Are You (or Your Firm) Affiliated with a Broker-Dealer? If the answer is yes, then walk away.
- Does Your Firm Offer Proprietary Mutual Funds or Separately Managed Accounts? Hopefully, the answer is no.
- Do You or Your Firm Receive Any Third-Party Compensation for Recommending Particular Investments? You need to know that your advisor has no incentive to recommend products that will shower him or her with commissions, kickbacks, consulting fees, trips, or other goodies.
- What’s Your Philosophy when it Comes to Investing?
- What Financial Planning Services do You Offer Beyond Investment Strategy and Portfolio Management?
- Where Will my Money be Held? A fiduciary advisor should always use a third-party custodian to hold your funds.
SECTION II: THE UNSHAKEABLE PLAYBOOK
Four Principles That Can Help Guide Every Investment Decision You Make
- Don’t Lose. The best investors are obsessed with avoiding losses. Why? Because they understand a simple but profound fact: the more money you lose, the harder it is to get back to where you started.
- Asymmetric Risk/Reward. You need to take big risks to achieve big returns. The best investors don’t fall for this high-risk, high-return myth. Instead, they hunt for investment opportunities that offer what they call asymmetric risk/reward: a fancy way of saying that the rewards should vastly outweigh the risks.
- Tax Efficiency. Taxes can easily wipe out 30% or more of your investment returns if you’re not careful. Yet mutual fund companies love to tout their pretax returns, obscuring the reality that there’s only one number that truly matters: the net amount that you actually get to keep
- Don’t put all your eggs in one basket.
How to Navigate Crashes and Corrections to Accelerate Your Financial Freedom
If you live in fear, you’ve lost the game before it even begins. How can you achieve anything if you’re too scared to take a risk? You can never know what the stock market will do. But that uncertainty isn’t an excuse for inaction.
Prepare for the bear
Here’s what you have to remember, based on more than a century of history: the short-term outlook may look dire, but the stock market always rebounds. This historical perspective gives me unshakeable peace of mind, and I hope it will help you to keep your eyes on the prize, regardless of the corrections and crashes we encounter in the years and decades to come. The best investors know that the gloom never lasts.
How to prepare for the next bear market by constructing a diversified portfolio that reduces your risks and enhances your returns.
As a financial advisor, I construct a client’s portfolio by combining asset classes, each with different risk characteristics and different rates of return. The goal? To balance the return you need to achieve with the risk you’re comfortable taking. The beauty of diversification is that it can allow you to achieve a higher return without exposing yourself to greater risk. How come? Because different asset classes don’t usually move in tandem.
Asset options involve stocks, bonds & alternative investments (real estate, private equity funds, gold etc.) In reality, the type of assets you own should be matched to what you personally need to accomplish.
What asset classes will give you the highest probability of getting from where you are today to where you need to be? In other words, the design of your portfolio must be based on your specific needs.
- Asset allocation drives return. Deciding on the right balance of stocks, bonds, and alternatives is the most important investment decision you’ll ever make.The moral: never bet your future on one country or one asset class.
- Use index funds for the core of your portfolio.
- Always have a financial cushion.
- The rule of seven. Ideally, we like our clients to have seven years of income set aside in income-producing investments such as bonds and MLPs. If stocks crash, we can tap these income-producing assets to meet our clients’ short-term needs.
SECTION III: THE PSYCHOLOGY OF WEALTH
Psychology either makes you or breaks you, so it’s imperative to have a robust system that enables you to stay on target. 80% of success is psychology and 20% is mechanics.
The Six Biggest Mistakes Investors Make and How to Avoid Them
Mistake 1: Seeking Confirmation of Your Beliefs Why the Best Investors Welcome Opinions That Contradict Their Own
For investors, confirmation bias is a dangerous predisposition.
Let’s say you love a particular stock or fund that’s performed exceptionally well in your portfolio over the last year. Your brain is wired to seek out and believe information that validates you owning it.
The Solution: ask better questions and find qualified people Who disagree with you.
Mistake 2: Mistaking Recent Events for Ongoing Trends Why Most Investors Buy the Wrong Thing at Exactly the Wrong Moment
One of the most common—and dangerous—investing mistakes is the belief that the current trend will continue.
The Solution: Don’t Sell Out. Rebalance: what the best investors in the world do is create a list of simple rules to guide them so that when things get emotional, they stay the course and remain on-target long term.
Mistake 3: Overconfidence Get Real: Overestimating Our Abilities and Our Knowledge Is a Recipe for Disaster!
We consistently overestimate our abilities, our knowledge, and our future prospects.
The Solution: Get real, be honest. When it comes to investing, self-deception may be the biggest expense of all!
Mistake 4: Greed, Gambling, and the Quest for Home Runs It’s Tempting to Swing for the Fences, but Victory Goes to the Steady Survivors
The best way to win the game of investing is to achieve sustainable long-term returns. But it’s enormously tempting to swing for home runs, especially when you think other people are getting rich faster than you!
The Solution: It’s a Marathon, Not a Sprint. Remember that.
Mistake 5: Staying Home It’s a Big World out There—So How Come Most Investors Stay So Close to Home?
Humans have a natural tendency to stay within their comfort zone.
The Solution: Expand Your Horizons. By diversifying internationally, you’re not only reducing your overall risk but also increasing your returns.
Mistake 6: Negativity and Loss Aversion Your Brain Wants You to Be Fearful in Times of Turmoil—Don’t Listen to It!
The trouble is, losing money causes investors so much pain that they tend to act irrationally just to avoid this possibility!
The Solution: Preparation is key! The single best way to handle market turmoil—and the fears it can trigger—is to be prepared for it.
Mastering Your Mind
These simple rules and procedures will make it easier for you to invest for the long term; to trade less; to lower your investment fees and transaction costs; to be more open to views that differ from your own; to reduce risk by diversifying globally; and to control the fears that could otherwise derail you during bear markets. Will you be perfect? No. But will you do better? You bet! And the difference this makes over a lifetime can amount to many millions of dollars!
Making the Most Important Decision of Your Life
If this book helps you to become financially free, I’ll be thrilled for you. But if I’m honest, I don’t believe that’s enough. Why not? Because having financial wealth doesn’t guarantee that you’ll be wealthy as a human being.
But real wealth is about so much more than money. Real wealth is emotional, psychological, and spiritual. If you’re financially free, but you’re still suffering emotionally, then what kind of victory is that?
When it comes to the science of achievement, there are three key steps that can enable you to achieve whatever it is you want.
- The First Step to Achieving Anything You Want Is Focus. Remember: wherever your focus goes, your energy flows.
- The Second Step Is to Go Beyond Hunger, Drive, and Desire, and to Consistently Take Massive Action. A lot of people dream big but never get started! To succeed, you need to take massive action.
- The Third Step to Achieving Whatever We Want Is Grace. Some people call it luck, some people call it God. Here’s what I can tell you, based on my own experience: the more you acknowledge grace in your life, the more you seem to have it!
The art of fulfilment
The art of fulfillment is an even more important skill to master. Why? Because if you master the external world without mastering the internal world, how can you be truly and sustainably happy? That’s why my greatest obsession today is the art of fulfillment.
- The First Principle: You Must Keep Growing. Everything in life either grows or dies. That goes for relationships, businesses, or anything else.
- The Second Principle: You Have to Give. If you don’t give, there’s only so much you can feel inside, and you’ll never feel fully alive.
Remember: money doesn’t change people. It just magnifies who they already are: if you have a lot of money and you’re mean, then you have more to be mean with; if you have a lot of money and you’re generous, you’ll naturally give more.
“Success without fulfilment is the ultimate failure”
‘Remember: money doesn’t change people. It just magnifies who they already are.’
Your mind & decisions
Either you master your mind or it masters you. The secret of living an extraordinary life is to take control of the mind, since this alone will determine whether you live in a suffering state or a beautiful state.
In the end, it’s all about the power of decisions. Our lives are shaped not by our conditions, but by our decisions.
Will you commit to enjoying life not only when everything goes your way but also when everything goes against you, when injustice happens, when someone screws you over, when you lose something or someone you love? Unless we make this definitive decision to stop suffering and live in a beautiful state, our survival minds will create suffering whenever our desires, expectations, or preferences are not met. What a waste of so much of our lives!
‘Our lives are shaped not by our conditions, but by our decisions.’
The 90-second Rule
Whenever I start to suffer, I give myself 90 seconds to stop it so that I can return to living in a beautiful state.
Gently breathe and slow things down. Step out of the situation and start to distance yourself from all those stressful thoughts that your brain is generating.
It’s natural for these thoughts to arise, but they’re just thoughts. When you slow down, you realize that you don’t have to believe these thoughts or identify with them.
Once detached from these thoughts, start to focus on something you appreciate. This shift in focus allows your spirit to enter the game, you will be able to rewire your brain to see the good in situations if you practice this consistently.
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