TLDR; Balance your security, risk/growth, dream/splurge buckets in your portfolio. Make sure you stay on track by rebalancing, tax harvesting, and dollar cost averaging on a regular basis.
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Note: This article is part of a section-by-section break down of the book Money Master the Game by Tony Robbins. Click here to start at the introduction to this series: The Journey to Financial Freedom.
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At the beginning of this journey, I was asking questions like, “How much should I save? How much should I invest? and where?” Section 4 of Money Master the Game (affiliate link) gave me the tools I need to answer those questions.
In section one of MMG we decided to save a certain percentage of money from our paychecks to keep forever. Now we’ll invest that money so that, eventually, we’ll make enough of the interest to live off of for the rest of our lives. How you invest those savings is determined by how you decide to allocate your portfolio.
Allocation buckets
Tony suggests splitting your portfolio into two main buckets (security and risk/growth) and one small bucket (dream/splurge). The first bucket, security, is used to house money you don’t want to risk losing. Accounts, assets, and investments in this bucket will have very little risk attached to it and, probably, low yielding. The second bucket, risk/growth, will be used to grow your portfolio. The investments in this bucket will be riskier and higher yielding. The last bucket, dream/splurge, is used to enjoy life now (YOLO).
Bucket breakdowns
- Security bucket: cash, bonds, your home (if it’s not an investment property), a pension, annuity, life insurance policy, ect.. Anything you are pretty sure will yield positive or non-negative results.
- Risk/Growth bucket: stocks, high-yield bonds, real estate investment trust, commodities, currencies, collectibles, structured notes, etc.
- Dream/splurge bucket: cash. Note: The dream bucket contradicts the keep-for-life mentality so you may want to increase your savings amount to account for your dream bucket. For me, I had to bump it up 5% for my dream bucket.
Decide on your allocations
The decision of what percentage to allocate to each bucket is a matter of preference and comfort. Each of us will have an allocation that works for our personality. If you’re more of a risk taker maybe you’re okay with 90% in your risk bucket. If you’re more cautious (like me) maybe 10% risk is more your speed. Whatever it is make sure you’re comfortable with it. If you have no idea, there is a quiz you can take to help you find out.
Once you have your allocation, do a gut check. Add up all your assets apply your ratio and ask yourself, “Am I okay with losing everything in my risk bucket?” If the answer is yes, you’re golden. If not then readjust your ratios until the answer to that question is yes.
Practices to keep you on track
There are three more practices described in the book that make asset allocations powerful.
- Rebalancing: the practice of periodically (e.g., once a quarter) checking that your portfolio is still in the proportions you’ve set. Rebalancing your portfolio helps you take money off the table when you win.
- Dollar cost averaging: the practice of depositing the same amount of money across all your accounts on a regular basis. Dollar cost averaging makes it easy to time the market—you don’t.
- Tax harvesting: the practice of cutting your losses by taking advantage of this tax benefit. You can learn more about tax harvesting here.
Putting it all together
Knowing your allocations and employing the practice of rebalancing, dollar cost averaging, and tax harvesting sets you up for success in investing. This helps you identify, generally, where to put your money and in what amounts. When you’re ready, you can apply these ideas to your portfolio. I actually haven’t applied this to my portfolio yet because in section 5 of MMG Tony describes the asset allocations, with the specific asset classes, of top investors in the field—including one he’s calling the all seasons portfolio. I want to use that information to inform my decisions.
This is a lot to take in. Let me know if you have any question or if there’s anything I can clarify. Feel free to send this article to people you think would get value from this information.
Update: I’ve completed summaries for all sections of MONEY Master the Game and wrote a book review. Find the links to it all below.
- Intro: Journey to Financial Freedom
- Step 1: Pay yourself first
- Step 2: Understand the rules
- Step 3: Set your target dollar amounts
- Step 4: Determine your allocations <- You are here
- Step 5: Set up your portfolio
- Bonus: Full book review of MONEY Master the Gam