This article is an excerpt from the Shortform book guide to "Money: Master the Game" by Tony Robbins. Shortform has the world's best summaries and analyses of books you should be reading.
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Are you wondering how to build an investment portfolio? Do you want to mitigate your losses while constantly gaining money?
According to Tony Robbins in his book Money: Master the Game, building an investment portfolio is key to becoming content with your financial situation. While it’s a long process, Robbins says that being patient and investing wisely can increase your chances of a successful and wealthy outcome.
Keep reading for an in-depth guide to creating an investment portfolio that will make you rich.
Building an Investment Portfolio
To know how to build an investment portfolio, you need to learn from those who’ve proven their skill—in this case, America’s top billionaire investors. After meeting with many top investors, Robbins advocates for building an investment portfolio that mimics the market and minimizes losses while growing steadily over time. This implements three principles: Play the long game, diversify your assets, and mitigate your downside.
Play the Long Game
The most reliable way to build wealth is to hold your investments for a long period of time. The best way to do this is with an index fund, a collection of stocks that mimics an overall market index, such as the S&P 500. In other words, owning an index fund means you own stock in every company on that index.
Since the market averages growth over the long term, holding an index fund nets you returns that mimic the growth of that index. If you own an S&P 500 index fund and the S&P 500 grows, your investments grow too.
Robbins says that you don’t need to take big risks to have big success. While index funds grow modestly over time, they offer consistent growth, and many experts consider them to be invaluable assets.
Diversify Your Assets
It’s important to properly allocate your assets—for example, by holding multiple types of bonds or multiple index funds.
The overriding goal of diversifying your assets is to build a portfolio that can withstand both good and bad market conditions: If one asset plummets, the rest buffer the loss. The market always “reverts to the mean”—booms and busts are temporary, while average growth is the general rule. If you allocate intelligently, you can mitigate your losses in bad times and ensure substantial gains in good times.
The key to proper asset allocation is to continually rebalance your portfolio. This means maintaining the same proportional divisions that you first start your buckets (your financial divisions) with—for example, a 50% conservative, 30% aggressive, and 10% “for fun” allocation.
These proportions will go out of balance when the buckets rise or fall according to their assets’ performance. When this happens, reallocate funds until you’ve re-established the original proportion. For example, your aggressive bucket might have a fantastic month, returning enough to become 40% of your funds. To rebalance, you can move money from that aggressive bucket into the other two until the proportions are correct.
This matters because long-term investing requires you to set up a strategy and commit to it. If you get excited by short-term gains and fail to rebalance, you’ll lose that much more money when the markets inevitably fall again, and all your hard work designing your investment portfolio will be thrown out the window.
Mitigate Your Downside
The final step in learning how to build your investment portfolio is to mitigate your downside. In investing, losses are more impactful than gains: If a $10,000 investment drops 25% to $7,500, you’ll need to gain 34% ($2,550) to break even again. So above all else, avoid losing money as best as you can. Robbins offers these tactics:
Tactic #1: Find opportunities for asymmetric risk/reward. This means that you only risk your money if the chance of gains is higher than the chance of losses. For example, you might use an annuity that ensures your principle is up to 100% while guaranteeing modest returns. That way, you can only gain money and you’re protected against the downside.
(Shortform note: In Skin In the Game, Nassim Nicholas Taleb argues that pursuing wealth while minimizing losses is actually unethical. Because you have nothing to lose if you fail, you’re free to pursue your self-interest without thought of the consequences of your actions. If investing is a zero-sum game as Robbins says, then every dollar you earn risk-free is a dollar someone else loses. Taleb argues that we respect those who gain wealth through risky endeavors, such as running a tech startup, more than those who gain wealth via risk-free means.)
Tactic #2: Get tax efficient. Several different accounts—most notably Roth IRAs and Roth 401(k)s—allow you to pay tax upfront so that you need not pay tax when you withdraw funds later on. In addition, Robbins recommends specialized life insurance plans—such as the TIAA-CREF—that allow you to invest through a tax-free insurance “wrapper,” so that your compounding avoids tax and accelerates much more quickly. (Shortform note: In 2019, the Teachers Insurance and Annuity Association stopped offering the special life insurance plans recommended by Robbins.)
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- Tony Robbins’s approach to changing your money mindset and financial strategy
- Why money is not the end goal, but rather a tool
- Why you should play the long game rather than trying to get rich quick