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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.
brokers have a vested interest in hawking expensive products,
You’ll learn to distinguish between three different types of advisors so you can sidestep the salespeople and choose a fiduciary who is required by law to act in your best interests. We’ll also give you the criteria to judge whether a particular advisor is right or wrong for you, based on fact, not on how likeable he or she is.
a broker, • an independent advisor, or • a dually registered advisor.
“Your broker is not your friend.”
brokers tend to earn a lot more money. All those fat fees from selling financial products can be extremely lucrative. By contrast, RIAs don’t accept sales commissions.
the vast majority of independent advisors are registered as both fiduciaries and brokers. WTF?! In fact, as many as 26,000 out of 31,000 RIAs operate in this grey area where they have one foot in both camps.
only 5,000 of the nation’s 310,000 financial advisors are pure fiduciaries.
90% of financial advisors are really just brokers in disguise.
You know that the odds of finding good advice improve dramatically if you steer clear of all brokers—however unfair that seems—and work instead with independent advisors who have a fiduciary duty to put your interests first.
Can you imagine hiring a personal trainer who hasn’t exercised in decades or a nutritionist who’s pounding down Twinkies while telling you to eat vegetables?
Creative Planning, the registered investment advisory firm run by my coauthor, Peter Mallouk, provides conflict-free investment advice that is also remarkably comprehensive.
If you want a shortcut, you can start by asking Creative Planning for a free second opinion by visiting www.getasecondopinion.com.
complexity being the enemy of execution?
Execution is everything. I don’t want to needlessly complicate matters so that you end up sitting on a mountain of rich information but don’t know what to do with
CORE PRINCIPLE 1: DON’T LOSE
Paul Tudor Jones told me, “The most important thing for me is that defense is 10 times more important than offense. . . . You have to be very focused on protecting the downside at all times.”
Ray Dalio. Forbes says he’s produced $45 billion in profits for his investors—more than any other hedge fund manager in history. His net worth is estimated at $15.9 billion! I’ve met a lot of extraordinary people over the years, but I’ve never met anyone smarter than Ray.
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.
investors get hurt by market bubbles because they start to act as if the future will bring nothing but sunshine.
“Don’t even bring me an investment idea unless you first tell me how we can protect against or minimize the downside.”
CORE PRINCIPLE 2: ASYMMETRIC RISK/REWARD
According to conventional wisdom, you need to take big risks to achieve big returns. But 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. In other words, these winning investors always seek to ...
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“What five-to-one does is allow you to have a hit rate of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”
‘Protect the downside.’
reduce risks while maximizing returns.
Think back to the financial crisis of 2008–09. At the time, it felt like hell on earth. But if you had the right mind-set and your eyes were open, the opportunities were heavenly! You couldn’t move without tripping over a bargain!
winter is always followed by springtime,
Buffett did just that in late 2008, investing in fallen giants such as Goldman Sachs and General Electric, which were selling at once-in-a-lifetime valuations. Better still, 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!
CORE PRINCIPLE 3: TAX EFFICIENCY
If you sell an investment that you’ve owned for less than a year,
One of the most serious problems in the mutual fund industry, which is full of serious problems, is that almost all mutual fund managers behave as if taxes don’t matter. But taxes
spent much of my life living in California, where—after tax—I kept as little as 38 cents of every dollar I earned.
An MLP that had sold previously for $100 paid an annual income royalty of $5 per share—that’s 5% income per year on the investment. When the price dropped to $50, the MLP still paid out $5 per share of income. But this now amounted to a 10% annual income return!
CORE PRINCIPLE 4: DIVERSIFICATION
Diversify Across Different Asset Classes. Avoid putting all your money in real estate, stocks, bonds, or any single investment class. 2. 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. 3. Diversify Across Markets, Countries, and Currencies Around the World. We live in a global economy, so don’t make the mistake of investing solely in your own country. 4. Diversify Across Time. You’re never going to know the right time to buy anything. But if you keep adding
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Paul Tudor Jones told me, “I think the single most important thing you can do is diversify your portfolio.” This message was echoed in my interviews with Jack Bogle, Warren Buffett, Howard Marks, David Swensen, JPMorgan’s Mary Callahan Erdoes, and countless others.
Between 2000 and the end of 2009, US investors experienced what has become known as the “lost decade” because the S&P 500 was essentially flat despite its major swings.
Burt Malkiel authored a Wall Street Journal article titled “ ‘Buy and Hold’ Is Still a Winner.” In it he explained that if you were diversified among a basket of index funds—including US stocks, foreign stocks, and emerging-market stocks, bonds, and real estate—between the beginning of 2000 and the end of 2009, a $100,000 initial investment would have grown to $191,859.
That’s a 6.7% average annual return during t...
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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). He
“The holy grail of investing is to have 15 or more good—they don’t have to be great—uncorrelated bets.”
this includes investments in stocks, bonds, gold, commodities, real estate, and other alternatives. 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.
Italy, where I stayed in a beautiful fishing village called Portofino.
simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful.
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.
You’ll even learn to welcome bear markets because of the unparalleled opportunities they create
“Shouldn’t we get out of stocks now and go to cash?” they’d ask. “Doesn’t this crash feel different?” This reminded me of Sir John Templeton’s famous remark: “The four most expensive words in investing are ‘This time it’s different.’ ” In the midst of a market meltdown, people always think this time is different! Battered by all the bad news in the media each day, they begin to wonder if the market will ever recover—or if something has fundamentally broken that can’t be fixed. I kept reminding my clients that every bear market in US history has eventually become a bull market, regardless of
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Why would you ever bet against this long-term pattern of resilience and recovery? 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.
Templeton made his first fortune by investing in dirt-cheap US stocks during the dark days of World War II. He later explained that he liked to invest at “the point of maximum pessimism,” when bargains were everywhere. Likewise, Warren Buffett invested aggressively in 1974 when markets were slammed by the Arab oil embargo and Watergate. While others were filled with despair, he was exuberantly bullish, telling Forbes: “Now is the time to invest and get rich.”
