Unshakeable: Your Financial Freedom Playbook

by Anthony Robbins

Creative Planning, the registered investment advisory firm run by my coauthor, Peter Mallouk, provides conflict-free investment advice that is also remarkably comprehensive.

CORE PRINCIPLE 1: DON’T LOSE

we have to design an asset allocation that ensures we’ll “still be okay,” even when we’re wrong.

Asset allocation is simply a matter of establishing the right mix of different types of investments, diversifying among them in such a way that you reduce your risks and maximize your rewards.

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. In other words, these winning investors always seek to risk as little as possible to make as much as possible. That’s the investor’s equivalent of nirvana.

One way to achieve asymmetric risk/reward is to invest in undervalued assets during times of mass pessimism and gloom. As you’ll learn in the next chapter, corrections and bear markets can be among the greatest financial gifts of your life.

That’s why “value” investors like Warren Buffett lick their chops during bear markets. The turmoil enables them to invest in beaten-up stocks at such low prices that the

he structured these investments in ways that reduced his risk even further. For example, he invested $5 billion in a special class of “preferred” shares of Goldman Sachs, which guaranteed him a dividend of 10% a year while he waited for the stock price to recover!

You should take every opportunity to invest in a tax-deferred way.”

Whenever someone tells me about a financial opportunity that seems to offer enticing returns, my response is always the same: “Is that net?” More often than not, the person replies, “No, that’s gross.” But the pretax figure is phony, whereas the net number doesn’t lie. Your goal, and mine, is always to maximize the net.

The fourth and final principle in the Core Four is perhaps the most obvious and fundamental of all: diversification. In its essence, it’s what almost everyone knows: don’t put all your eggs in one basket.

Diversify Across Different Asset Classes. Avoid putting all your money in real estate, stocks, bonds, or any single investment class.

Diversify Within Asset Classes. Don’t put all your money in a favorite stock such as Apple, or a single MLP, or one piece of waterfront real estate that could be washed away in a storm.

Diversify Across Markets, Countries, and Currencies Around the World. We live in a global economy, so don’t make the mistake of i...

Diversify Across Time. You’re never going to know the right time to buy anything. But if you keep adding to your investments systematically over months and years (in other words, dollar-cost averaging), you’...

David told me how individual investors can diversify by owning low-cost index funds that invest in six “really important” asset classes: US stocks, international stocks, emerging-market stocks, real estate investment trusts (REITs), long-term US Treasuries, and Treasury inflation-protected securities (TIPS).

holy grail of investing is to have 15 or more good—they don’t have to be great—uncorrelated bets.” In other words, everything comes down to owning an array of attractive assets that don’t move in tandem

Ray emphasized 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 that risk.”

Despite his best intentions, my big-hearted endocrinologist’s flawed advice could have ruined my life.

This was possible only because I made myself unshakeable in the face of uncertainty. If I’d overreacted or followed unquestioningly the advice of either doctor without considering all of my options, I’d be missing a part of my brain, or I’d have cancer, or perhaps I’d be dead. If I’d relied on them for my certainty, it would have been catastrophic. Instead, I found certainty within myself, even though nothing in my external circumstances had changed.

It’s the same with investing. You can never know what the stock market will do. But that uncertainty isn’t an excuse for inaction. You can take control by educating yourself, studying the market’s long-term patterns, modeling the best investors, and making rational decisions based on an understanding of what’s worked for them over decades. As Warren Buffett says, “Risk comes from not knowing what you’re doing.”

But I’ve flourished for the past 25 years because I learned to live fearlessly.

while others live in terror of bear markets, you’ll discover in this chapter that they are the single greatest opportunity for building wealth in your lifetime. Why? Because that’s when everything goes on sale!

A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread. —WARREN BUFFETT IN OCTOBER 2008, explaining why he was buying stocks as the market crashed

Tony has asked me to share this story with you because it embodies a central lesson of this book: bear markets are either the best of times or the worst of times, depending on your decisions. If you make the wrong decisions, as most people did in 2008 and 2009, it can be financially catastrophic, setting you back years or even decades. But if you make the right decisions, as my firm and its clients did, then you have nothing to fear.

First, you need the right asset allocation—a fancy term for the proportion of your portfolio that’s invested in different types of assets, including stocks, bonds, real estate, and alternative investments.

Second, you need to be positioned conservatively enough (with some income set aside for a very rainy day), so that you won’t be forced to sell while stocks are down.

As I see it, 90% of surviving a bear market comes down to preparation. What’s the other 10%? That’s all about how you react emotionally in the midst of the storm.

Can you imagine how investors felt if they’d panicked and sold during those bear markets? They not only made the disastrous mistake of locking in their losses but missed out on those massive gains as the market revived. That’s the price of fear.

Throughout the crash, we continued to invest heavily in the stock market on behalf of our clients. We took profits from strong asset classes such as bonds and invested the proceeds in weak asset classes such as US small-cap and large-cap stocks, international stocks, and emerging-market stocks. Instead of betting on individual companies, we bought index funds, which gave us instant diversification (at a low cost) across these massively undervalued markets.

The additional reward you receive for taking that additional risk is called a risk premium. When experts determine your asset allocation, they evaluate the risk premium for each asset. The riskier an asset seems to be, the greater the rate of return an investor will demand.

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.

When you buy a stock, you’re not buying a lottery ticket. You’re becoming a part owner of a real operating business. The value of your shares will rise or fall based on the company’s perceived fortunes. Many stocks also pay dividends, which are quarterly distributions of profits back to the shareholders.

By investing in a stock, you’re making the shift from being a consumer to being an owner.

If you buy an iPhone, you’re a consumer of Apple products; if you buy Apple stock, you’re an owner of the company—and are entitled to...

In short, bad news is an investor’s best friend.

suggest you commit that line to memory: “Over the long term, the stock market news will be good.” If you truly understand this, it will help you to be patient, unshakeable, and ultimately rich.

As much as possible, try to keep a financial cushion, so you’ll never have to raise cash by selling stocks when the market is crashing. One way to build and maintain that cushion is to invest in bonds.

When you buy a bond, you’re making a loan to a government, a company, or some other entity. The financial services industry loves to make this stuff seem complex, but it’s pretty simple. Bonds are loans.

When you lend money to the federal government, it’s called a Treasury bond. When you lend money to a city, state, or county, it’s a municipal bond. When you lend money to a company such as Microsoft, it’s a corporate bond. And when you lend money to a le...

The odds that a company will go bust and fail to repay its bondholders are higher than the odds that the US government will default on its loans. So the company has to pay a higher rate of return.

There’s a simple reason why you receive a higher rate for lending the money over a longer period: it’s riskier.

Why do people want to own bonds? For a start, they’re much safer than stocks. That’s because the borrower is legally required to repay you.

So where do bonds make sense in your portfolio? Conservative investors who are retired or can’t tolerate the volatility of stocks might choose to invest a large percentage of their assets in bonds. Less conservative investors might put a smaller portion of their assets in high-quality bonds to meet any financial needs that could arise over the next two to seven years.

More aggressive investors might keep a portion of their money in bonds to provide them with “dry powder” that they can use when the stock market goes on sale.

This is exactly what Creative Planning did during the financial crisis: we sold some of our clients’ bonds and invested the proceeds in the stock market...

There’s just one problem: it’s hard to be enthusiastic about bonds in today’s weird economic environment. Yields are abysmally low, so you earn a paltry return for the risk you’re taking. It seems particularly unappealing to invest in ...

The challenge is that you earn nothing these days if you keep your money in cash.

As I see it, bonds are now the cleanest dirty clothing in the laundry pile.