Category Archives: Section 7

Unshakeable – Your Financial Freedom Playbook

I received my copy of “Unshakeable” at the end of February. It’s a slim, easy read of 141 pages about investment strategy / tactics, supplemented with a further 80-or-so pages about motivation and the psychology of wealth.

So, what’s the book all about & how is it different from “Money: Master the Game”?

Tony Explains right up front on page 10:

First, I want to reach as many people as possible by writing a short book that you can read in a couple of evenings or a weekend. If you want to go deeper, I hope you’ll also read Money: Master the Game, but I understand if that big monster seems intimidating.

So the good news is that if you’ve read “the big monster”, you already know all of the detailed stuff you’ll find in “Unshakeable”. Of course, “Unshakeable” is full of the same America-specific language as “Money: Master the Game” – but there’s nothing new here to surprise you in that regard.

So, is “Unshakeable” worth reading if you’ve already digested “Money: Master the Game”? I’d say yes – because its slimmer content allowed me to focus on the forest instead of the trees – and it helped me refine my thinking as a consequence.

I remember reading and re-reading “the big monster”, making notes and trying to distill the tactics that would allow me to successfully navigate the scary world of investing. In “Unshakeable”, it’s pretty-much all spelled out, check-listed and summarised – which makes it much easier to digest and avoid overwhelm.

If you were going to give someone a book about investment, it’s far more likely they’ll read and internalise “Unshakeable” than “Money: Master the Game”.

I won’t bother reiterating the points I’ve already summarised from “Money: Master the Game”. The same, low-cost, index-fund approach still forms the core of “Unshakeable”, but here are the passages I highlighted as I was reading

The greatest danger is being out of the (stock) market (p42)

From 1996 to 2015, the S&P 500 returned an average of 8.2% a year. But if you missed out on the top 10 trading days during those 20 years, your returns dwindled to just 4.5% a year. If you missed out on the top 20 trading days, your returns dropped from 8.2% a year to a paltry 2.1%. And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!

That blew me away – even though I’ve read a similar summary in the past – the notion that 1 month out of 120 is enough to completely scupper stock market returns makes it so clear to me that:

  1. Trying to ‘time’ buying and selling is futile
  2. Pound cost averaging – investing a little consistently over time – is the only way to always be ‘in’ the game

Go hunting for first trust deeds (p104)
Tony mentioned this in passing in “Money: Master the Game”.  The idea is to lend money against a real-estate asset where the return is high and the risk is low, because you can sell the asset to recover the debt if need be.

After reading “the big monster” I had no idea how to take action on this – so I didn’t do anything. Recently, however, the rise of property crowdfunding & P2P services have made this type of investment  quite accessible.

I wouldn’t call this a key part of my strategy (see “Core & Explore later) – but there are potentially high returns (10-12% pa) and relatively low risk opportunities here.

There’s a great P2P comparison web site called 4th Way. They recently ranked their top picks and rated PropLend as their #2 and FundingSecure as their #3.  (I’m not a fan of their #1 choice of LandBay because of the relatively low returns).

Bonus: If you haven’t already sorted out what to do with your 2016 ISA allowance, you can hold some of these property assets inside a new IFISA – meaning your profits are tax-free. Perhaps worth a look – particularly as the 2017 ISA allowance rises from £15K to £20K per person.

Diversify in 4 ways (p110)
On page 112, Ray Dalio summarises the benefits of diversification:

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.

“Unshakeable” reiterates how to diversify in these four ways:

  1. Across asset classes – stocks, bonds, real estate
  2. Within asset classes – multiple stocks, bonds, properties
  3. Across markets, countries & currencies – don’t over-invest in your ‘home’ market
  4. Across time – pound cost averaging – investing a little and often

Using bonds as ‘dry powder’ (p130)
During the last financial crisis, savvy investors sold bonds to snap up stocks at bargain prices. This is an interesting idea – but it does require a bit of an ‘active’ approach and may be best left to your trusted IFA – if you can find one.

Alternative investments (p131)
“Unshakeable” suggests publicly traded REIT’s as a way of diversifying within the real-estate category. I know almost nothing about this – so it’s on my list of things to research, starting here.

From my point of view, the biggest problems of owning ‘real’ real-estate assets are:

  • Illiquidity – if you need to sell, it’s only worth what someone is willing to pay at the time
  • No diversification – a big lump of cash all tied up in one building
  • Surprise costs – major things can and do go wrong with buildings
  • Relatively low returns – it varies a lot by property type and location
  • Maintenance and letting fees – can reduce net income substantially
  • UK tax changes – makes buy to let less and less attractive currently

Core and explore (p135)
Given that asset allocation (diversification) drives returns, what should the core of any portfolio look like?

  1. Use index funds for the core of your portfolio – I’m more than happy with my choice of the SWDA index fund – low, cost, good performance, well diversified.
  2. Have a cushion of income-producing liquid assets (REIT’s, bonds) which can be sold to buy stocks (index funds) at bargain prices
  3. Ideally have 7 years of income-producing liquid assets set aside to meet short-term cash needs (and avoid selling stocks when they are low).
  4. Explore – having sorted out the core, have a bit of fun with high-risk, high-return investments
  5. Rebalance – benefit from tax loss harvesting and buy assets when they’re cheaper

Life planning (p201)

This section was a good reminder to me to get this stuff sorted sooner rather than later.  What’s the point of accumulating wealth if we lose control of how it will be deployed and / or passed on to those we care most about?

Finally – My financial plan

got-a-planIt’s taken me a while  – almost a year to the day since I ordered and first read ‘Money Master the Game’ from Amazon.

I’ve met a whole bunch of IFAs, read a whole load of books, followed tons of blogs (see further reading).

I’ve been really hesitant to pull the pin and actually take action on my plan – because it seemed like a big, irreversible decision.

But, this morning, I’ve sent off the paperwork to Alliance Trust to start making payments into my pension (SIPP) account.

The long and short of it is that I decided to invest in 100% equities via a global equities index fund.  Now, this will seem pretty crazy to you, no doubt – but here’s my rationale ..

I’m assuming that you’re already convinced about index funds compared to active investing.  If so, the question is ‘which index fund to choose?’  Tim Hale’s book ‘Smarter Investing’ lays down some useful guidelines:

  • Tracking error should be below 2%
  • Full replication, not synthetic or derivative based
  • Total Expense Ratio below  0.4% for global equities
  • Size of the fund should be in excess of £100M
  • Fund should have been around longer than 5 years
  • Fund turnover should be below 5% per annum

In each of these cases, the Fidelity Index World scores well:

  • Tracking error is around 2% (it varies)
  • Physical / full replication
  • Total Expense Ratio is 0.12%
  • Size of the fund is £875M
  • Has been running for over 5 years
  • Fund turnover is almost zero

I plumped for a global index fund to benefit from diversification across all of the developed world’s stock markets.  There’s a line of argument that says that this exposes me to currency risk – which is true – but it seems to me there’s even greater risk of limiting myself to a UK tracker – just 10% of the world’s stocks.

So why 100% equities?  Why no bonds in there at all? It’s because I own a (mortgage free) property which generates a rental income – and as an asset class, that’s a lot like bonds.

So, the property and its rental income fall directly in my security bucket and I’ve squirrelled away some of that income in a deposit account so I can use the cash in an emergency.

I’m also contributing to a S&S ISA – buying the same index fund.  Both the ISA and the pension are using the Alliance Trust platform – because it’s cheap and it (mostly) works online OK.

I met a lot of IFAs, but none convinced me they could add significant value to this process.  Sure, they could help me design a more diversified portfolio, they could help me back-test their recommendations against my plan and see which one would win, but they have exactly the same knowledge about the future as I do – none.

There’s no way of telling if my plan will out-perform theirs in the future – or vice versa.  We can make assumptions based on past performance, but that didn’t help most of us see the whole 2007/2008 fandango on the horizon.

Any IFA will have more knowledge and experience than me – but their crystal ball is as useless as  mine.  None of them said my plan was crazy – just maybe a little unrefined.

On the upside, it’s a plan I understand, one I can stick to and manage myself.  It’s not a perfect plan – but it’s mine. And, more importantly, as of today, it’s the best kind of plan – one that I’ve put in to action.

Because my investments are 100% equities, I need to be fairly certain that I’ve got a long enough timeline to smooth out the volatility that will undoubtedly happen.  I’m not planning on touching the ISA or SIPP for at least 10 years – hopefully more like 20.

But, if this plan all goes wonky, here’s my plan B.

Leave the pension and ISA alone for as long as humanly possible and use my cash buffer as slowly as possible.

It’s not rocket science – but the biggest threat to the future value of my pension pot isn’t making poor investment choices or the volatility of the stock market – it’s having to sell shares when they’re low because I need the cash.

Hence the importance of having a cash buffer.  Hell, if push comes to shove, I’ll work in my local supermarket to eek out the cash a bit longer – hopefully long enough for equities to bounce back and for my pension pot to regain some value.

Clearly I can’t know what the future will bring, can’t know how pension rules will change, can’t tell what the state of my health will be, how long I’ll live, what will happen to property, bonds, equities, etc etc etc.

But doing nothing would also be a mistake.

Making basic choices now which afford me some flexibility in the future is about as good a it gets.  So, when I get to 70, 80 or 90 years old I’ll be able to say “I did what I could do” rather than “If only I had ..”.

7 simple steps: Your checklist for success

chequered flagChapter Overview
A summary of the main points and my personal action list

You made it to the finishing line – yay!

Now that I’ve read through the book twice, I realise that I was unnecessarily bamboozled by a plethora of jargon I didn’t understand.

  • What’s a 401K?
  • What’s a Roth IRA?
  • How does the S&P 500 compare to the FTSE?
  • Etc, etc ..

It turns out that, although I now know the answers to these questions and many more, they are all largely irrelevant to my investment planning.  However, this fear of the unknown is precisely what feeds the financial industry.

What I’ve arrived at are the following conclusions which are pretty self-explanatory and simple.  There’s no great mystery about investing – but there’s a massive industry that gets paid when you delegate your decision making to them.

Nobody (apart from independent bloggers and other altruistic souls) has an interest in simplifying this stuff – because there’s just too much money to be made from alluding to subtleties and complexities which you clearly do not understand.

Don’t be fooled.  Anybody who can read and write can understand this stuff, it’s not rocket science – but some of it is counter-intuitive.

While there are many up-and-coming online services available in the US to smooth the financial planning process, in most cases we don’t have access to like-for-like services here in the UK (yet).

However, don’t think that consulting a high-cost IFA is your only alternative.  With a little bit of reading and research, you can figure this stuff out for yourself.

Step 1: Save

You actually need some spare cash to invest. Every pound you don’t spend is one you can invest instead.  That’s a double win! What’s more, if you get used to spending less, your retirement pot also can shrink – which means you can reach financial independence that much quicker.

There are some great blogs I now follow on this very subject, often  referring to FIRE (Financial Independence Retire Early). I’d highly recommend adding these personal finance sites to your reading list.  I continue to learn a lot from them.

Step 2: Know the Rules

The main takeaway in this section is that passive investing via low-cost index trackers is the best option for 99% of us.  Most of the people cannot hope to win most of the time by cherry-picking stocks and timing the market.  Statistically, there have to be winners and losers and your chances of winning consistently doing this are close to zero. If there’s one thing you should remember from the book, it’s this:

Fees and taxes matter more than the nuts and bolts of your portfolio.

The most tax-efficient vehicles for saving are pensions and ISAs.  There’s a £40K pa limit on pension contributions (currently) and a £15K pa limit on ISAs.  Saving more than £55K pa tax efficiently is tricky.

If the aim is to keep total fees below 1% pa, this pretty much precludes using an IFA who will charge between 0.5% and 1% pa.

Using the lowest cost funds and a low cost platform, you can keep fees below 0.5%pa – but adding an IFA fee to this is enough to make your otherwise sound investment strategy a bad one.

Step3: Make the game winnable

How much do you actually need to retire?  Taking a safe withdrawal rate (SWR) of 3% pa you need savings of £400K to yield a gross income of £1,000 per month – which will turn into £800 after income tax.

That’s a lot of capital to accumulate for a relatively small income – but that pretty much ‘guarantees’ that level of income forever.

Compare that to an annuity you purchase for £400K, and the income will likely be in the region of £500 per month.  Annuities are definitely worth considering carefully because there’s no getting out of them once you press the ‘buy’ button.

If you’re young and time is on your side, you can benefit from compound interest to grow your savings faster as time passes.  If you’re older and have fewer years to accumulate your nest egg, you need to save more aggressively.  There’s no magic wand here.

Step 4: Make the most important investment decision

Diversifying your investment is crucial.  Investing 100% in equities might give you the greatest return – but it also exposes you to the most risk.  Investing 100% in bonds is safer – but it’s unlikely you’ll meet your growth requirements this way.

Most people plump for a mix between equities and bonds as a way of smoothing the highs and lows of the stock market with the slow and steady ride promised by bonds.

Depending on your appetite for risk and the number of years you have until you need to access your retirement fund, the mix might range from 20% equities/80% bonds (low risk, lower return) to 80% equities / 20% bonds (higher risk, higher return).

By making regular investments every month, you’ll benefit from pound cost averaging because you’ll buy when equities are expensive AND cheap.  Over time, this will average out the price you pay for equities and is safer than investing lump sums.

As equities change in price, your target balance between equities and bonds can get out of whack – so it’s important to rebalance once a year or so to maintain your risk exposure.  Some funds automatically rebalance for you.

Step 5: Create a lifetime income plan

Not much for us in the UK to do here, except to set up a living trust so that your heirs and dependents can access and manage your estate if you are unable to do so or once you die.

Step 6: Invest like the 0.001%

  1. Pick a diversified low cost index fund.  The Vanguard LifeStrategy 40% Accumulation fund fits the bill for me.
  2. Pick a low-cost platform to enable you to buy and sell. I chose Alliance Trust.
  3. Place your investments in tax-efficient pension (SIPP for me) and/or ISA wrappers.
  4. Make regular monthly payments for as much as you are able or until you max out your £40K pa pension limit and your £15K pa ISA limit.
  5. Rinse and repeat for as long as you can.
  6. Consult a tax advisor BEFORE withdrawing any money from your pension account.

There it is.  That’s everything I learned from re-reading and researching Tony Robbins’ Money Master the Game.

In the course of figuring some of this stuff out, I’ve come across other books which might have been a better fit for me to read,  however ..

I read this book BECAUSE it had Tony Robbins’ name on it.  It’s highly unlikely that I would ever have read a pure finance book- because I was too intimidated by the entire subject.

So, while I’ve read a lot of criticism of the book, I think the main point is that it’s given personal-finance-phobic people like me a way in to the subject and demystified it enough for me to just get on with it. And for that I’m grateful 🙂

I’ll add the odd post now and then to the blog as my further reading dictates, but that’s pretty much all for now here.