Self-help guru Tony Robbins is out with a new investment book called Money: Master the Game: 7 Simple Steps to Financial Freedom.
Robbins is incredibly successful. Forbes estimates his net worth to be $480 million. However, if he ignored his own advice, he’d probably be worth a lot more.
[ad#Google Adsense 336×280-IA]Back in 2010, he advised his followers to sell stocks, right as the new bull market was picking up steam.
But that’s not my problem with Robbins.
I wouldn’t even have an issue with receiving financial advice from a self-help guru – if the advice was sound.
But I have very serious concerns about the model portfolio that he suggests.
In fact, if you follow it, you will all but assure yourself of ending up poorer.
Maybe not in actual dollars, but definitely in what those dollars can buy.
Let me explain.
The asset allocation he recommends in his book is as follows:
- 30% stocks
- 15% intermediate-term Treasurys
- 40% long-term Treasurys
- 7.5% gold
- 7.5% commodities.
Robbins is recommending 55% of your assets be invested in intermediate- and long-term Treasury bonds.
That is a horrible idea.
The basis for that recommendation is a 30-year back test that shows that asset allocation would have generated average annual returns of 9.7%. Very impressive.
But you have to remember that the past 30 years have been a rip-roaring bull market for bonds as interest rates fell from double digits in the early 1980s to record lows today.
My concern with this asset allocation is threefold:
- Bond prices are going to go down. When interest rates eventually rise (and they will) bond prices will fall. You could hold the bonds until maturity in order to avoid losing your principal.
- It won’t generate enough growth. By placing so much of your portfolio in bonds, you are limiting how much your portfolio can grow. Unless interest rates continue to fall, the only way you’re going to grow the portfolio is with the stocks, gold and commodities components. Considering that stocks are the only asset class proven to rise over the long term, having just 30% of the portfolio in stocks won’t get you to the finish line.
- It won’t deliver enough income. Additionally, the income generated from the bonds will be paltry. Today, a 10-year bond yields 2.3%. A 30-year bond yields 2.95%. And that’s before taxes. Are those yields going to help you reach your goals? 2.95% for the next 30 years? We could see inflation back at the historical average of 3.4% in the next few years. If that occurs and you’re making less than 3% before taxes on over half of your portfolio, your buying power will be destroyed.
This last item is critical. Using Robbins’ Treasury allocation suggestion, an investor would generate a yield of 2.77% before taxes. Assuming a 25% federal tax bracket, that drops to 2.08% after taxes.
Over the next 10 years, an investor with $100,000 in these Treasurys would amass $20,800 in interest. Today’s inflation rate is 1.66%. If it stayed the same, after 10 years you’d need $117,896 to buy the same $100,000 in goods and services today. So you’d be OK.
But do you really expect inflation to stay at 1.66%?
Keeping Up With Inflation
Even if inflation ticks higher to an average of just 2% (well below the historical average of 3.4%) over the next 10 years, you’ll need $121,899. So your Treasury mix isn’t even covering the rise in the cost of living. And if inflation climbs back to the 100-year average of 3.4%, $139,702 will be required for that same $100,000 in goods and services. But your Treasurys are worth only $120,800 – a 14% shortfall.
Unless inflation stays below 1.9% over the next 10 years, the Treasury mix recommended by Robbins will destroy your buying power. And if inflation does go higher, the price of the bonds will fall, which means if you want to sell the Treasurys in order to pick up higher yielding investments, you’ll sell at a loss.
The Oxford Club (the publisher of Investment U) has an Asset Allocation Model that remedies the above issues.
We recommend 60% of assets be held in stocks, with 30% in bonds. Of that 30%, 10% should be in inflation-adjusted Treasurys (TIPS), 10% in high-yield bonds and 10% in high-grade bonds. The TIPS ensure your Treasurys keep up with inflation and the high-grade and high-yield bonds will generate significantly more income than a Treasury. The other 10% is split evenly between precious metals and real estate investment trusts (REITs).
The 60% allocation in stocks will ensure your portfolio grows over the long term, much better than the 30% Robbins recommends.
Keep in mind, I have nothing against bonds, especially if you invest in them the right way – buying bonds at a discount and holding them to maturity. That way, you’re likely getting a higher yield and you’ll make some money on the bond at maturity.
But Robbins’ suggestion of keeping the majority of your portfolio in intermediate- and long-term Treasurys is probably only suitable for his neighbors on Palm Beach who might rather see their buying power erode slowly over time rather than take the chance on any capital losses.
Tony Robbins is famous for his books such as Awaken the Giant Within. Listening to his self-help advice may enable you to achieve more in life. But the only giant that’s going to be awakened if you follow Robbins’ financial advice is the gaping hole in your portfolio that your buying power and wealth gets sucked into.
Good investing,
Marc
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Source: Investment U