MONEY Master the Game: 7 Simple Steps to Financial Freedom (15 page)

It’s a short section, so pay attention because you’re going to want to take immediate action. By shattering these myths, you will be able to immediately “stop the bleeding” in areas where you never thought you needed to. Knowing these 9 Myths will protect you and insure that you get to the level of financial freedom that you’re truly committed to. Let’s begin!

WELCOME TO THE JUNGLE

Whether you are a seasoned investor or just beginning to see yourself as an investor, the jungle that Ray Dalio so vividly described holds the same dangers for all of us.
But most of the danger lies in the fact that what you don’t know
can
hurt you.

THE OFFER

I want you to imagine that someone comes to you with the following investment opportunity: he wants you to put up 100% of the capital and take 100% of the risk, and if it makes money, he wants 60% or more of the upside to come to him in fees. Oh, and by the way, if it loses money, you lose, and he still gets paid!

Are you in?

I’m sure you don’t need any time to think this through. It’s a no-brainer. Your gut response has to be, “There’s no way I’m doing this. How absurd!” The only problem is that if you’re like 90% of American investors, you’ve invested in a typical mutual fund, and, believe it or not, these are the terms to which you’ve already agreed.

That’s right, there is $13 trillion in actively managed mutual funds
³
with 265 million account holders around the world.

How in the world do you convince 92 million Americans to participate
in a strategy where they willingly give up 60% or more of their potential lifetime investment upside with no guaranteed return? To solve this riddle, I sat down with the 85-year-old investment guru Jack Bogle, the founder of Vanguard, whose 64 years on Wall Street have made him uniquely qualified to shed light on this financial phenomenon. His answer?

“Marketing!

“Tony, it’s simple. Most people don’t do the math, and the fees are hidden. Try this: if you made a onetime investment of $10,000 at age twenty, and, assuming 7% annual growth over time, you would have
$574,464
by the time you’re nearly my age [eighty].
But,
if you paid 2.5% in total management fees and other expenses, your ending account balance would only be
$140,274 over the same period.
”

“Let’s see if we’ve got this straight: you provided all the capital, you took all the risk, you got to keep $140,274, but you gave up $439,190 to an active manager!? They take 77% of your potential returns? For what?”

“Exactly.”

Money Power Principle 1. Don’t get in the game unless you know the rules!
Millions of investors worldwide are systematically marketed a set of myths—investment lies—that guide their decision making. This “conventional wisdom” is often designed to keep you in the dark. When it comes to your money, what you don’t know
can
—and likely will—hurt you. Ignorance is not bliss. Ignorance is pain, ignorance is struggle, ignorance is giving your fortune away to someone who hasn’t earned it.

A FAILED EXPERIMENT

It’s not just high-cost mutual funds that are the problem. The example above is just a peek under the sheets at a system designed to separate you from your money.

Without exception, every expert I have interviewed for this book (from the top hedge funds managers to Nobel Prize winners) agrees that the game has changed. Our parents didn’t have a fraction of the complexity or dangers to deal with that we have today. Why? They had a pension—a guaranteed income for life! They had CDs that paid conservative but reasonable
rates—not the 0.22% you would be paid at the time of this writing, which won’t even keep up with inflation. And some had the privilege of putting small investments into blue-chip stocks that paid steady dividends.

That ship has sailed.

The new system, which really got rolling in the early ’80s with the introduction of the 401(k), is an experiment that’s now been conducted for the most part on the single largest generation in US history: the baby boomers. How is this experiment working?

“This do-it-yourself pension system has failed,” said Teresa Ghilarducci, a nationally recognized expert in retirement security at the New School for Social Research and an outspoken critic of the system as we know it. “It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”

What’s changed? We exchanged our guaranteed retirement pensions with an intentionally complex and often extremely dangerous system, filled with hidden fees, which gave us “freedom of choice.” And somehow, in the midst of working your tail off, providing for your family, staying in shape, and taking care of the important relationships in your life, you are supposed to become an investment professional? You’re supposed to be able to navigate this labyrinth of products, services, and unending risk of your hard-earned money? It’s near impossible. That’s why most people give their money to a “professional,” often a broker. A broker who by definition works for a company that is
not
required by law to do what’s in your best interest (more on this baffling concept in Myth 4). A broker who gets paid to funnel your money to the products that may be the most profitable for him and/or his firm.

Now, let me be clear: this is
not
another bash-Wall-Street-book. Many of the large financial institutions have pioneered some extraordinary products that we will explore and advocate throughout this book. And the vast majority of people in the financial services industry care intensely for their clients, and more often than not, they are doing what they believe to be
the best thing. Unfortunately, many don’t also understand how the “house” reaps profits whether the client wins or not. They are doing the best they can for their clients with the knowledge (training) and the tools (products) they have been provided.
But the system isn’t set up for your broker to have endless options and complete autonomy in finding what’s best for you. And this could prove costly.

Giving up a disproportionate amount of your potential returns to fees is just one of the pitfalls you must avoid if you plan on winning the game. And here is the best news yet:

THE GAME IS STILL WINNABLE!

In fact, it’s more than winnable—it’s exciting as hell! Yes, there are major challenges and more pitfalls you must avoid, but consider how far we have come. Today, with the click of a button and a minimal charge, you can invest in just about anything you want anywhere in the world you want. “It’s easier than it’s ever been to do pretty well,” said James Cloonan in a recent
Wall Street Journal
article. Cloonan is founder of the nonprofit American Association of Individual Investors. “You just have to decide to do the right thing.”

Heck, just 35 years ago “you had to spend hours in a public library or write away to a company just to see its financial statements. Brokerage costs and mutual-fund fees were outlandish; tax rates were larcenous,” wrote Jason Zweig in his
Wall Street Journal
article “Even When Stocks Make You Nervous, Count Your Blessings.”

Aside from high-frequency traders, technology has made the world of investing a much more efficient space for all of us. And this fits perfectly with the millennial generation, which wouldn’t accept anything less. “For us, it’s all about convenience!” exclaimed Emily, my personal assistant, who is a “straight-down-the-fairway” millennial. “There is no tolerance for slow or inefficient. We truly want everything to be at the touch of a button. We order everything on Amazon; we lift one finger, and it’s done. I can stream a movie on Netflix. I can get a car registration online. I can buy stocks online. I can do my presentation online. This morning I took a picture of my check and had it in my bank account by six—I didn’t even have to get out of my pajamas.”

THE HOUSE HAS THE EDGE

Steve Wynn, the billionaire gambling mogul credited with transforming Las Vegas into the entertainment capital of the world, is one of my dearest friends. The casinos he’s built are considered to be some of the most magnificent playgrounds in the world. Through it all, he’s made his fortune from one simple truth: the house has the edge. But by no means does he have a guaranteed victory! On any given night, a high-rolling gambler can take millions out of Steve’s pocket. And they can also leave if his “house” doesn’t completely captivate them. On the other hand, nearly all mutual fund companies have a stacked deck. They are the ultimate casino. They’ve captured you, you’re going nowhere, and they are guaranteed revenue whether you win or not.

TWICE BURNED

After 2008, when the US stock market lost more than 37%, the financial world was completely changed for most Americans. Even five years later, a survey from Prudential Financial showed that 44% of American investors still say they would never put their money in the stock market again, while 58% say they lost faith in the market. But the insiders are still in the game. Why? Because they know better. They know the “right” way to play the game. They know that today there are powerful tools and strategies that have never existed before. Get this:

Today you can use a tool, issued and backed by one of the largest banks in the world, that will give you 100% principal protection guaranteed by its balance sheet
and
allow you to participate in 75% to 90% of the upside of the market (the S&P 500) without being capped! That is not a misprint. You can participate in up to 90% of the upside, but if the market collapses, you still get back 100% of your money! Sounds too good to be true? And if a product like this did exist, you would have already heard of it, right? Wrong. The reason? In the past, to
even hear
about this, you had to be in the top 1% of the 1%. These are not “retail” solutions, where they sit on the shelf. These are custom designed for those with enough money to partake.

This is just one example of how, as an insider, you’ll soon know the new rules of how to achieve wealth with minimal risk.

Risk comes from not knowing what you’re doing.

—WARREN BUFFETT

THE ROAD LESS TRAVELED

The journey ahead is one that requires your full participation. Together we are going to climb this mountain called Financial Freedom. It’s your personal Mount Everest. It won’t be easy, and it will require preparation. You don’t head up Everest without a very clear understanding of the dangers that lie ahead. Some are known, and some could sneak up on you like a violent storm. So before we set foot on the mountain, we must fully grasp what’s on the path before us. One false step could mean the difference between wondering how you will pay next month’s mortgage and an abundant life, free of
financial stress. We can’t ask someone to climb it for us, but we also can’t do it alone. We need a guide who has our best interests at heart.

THE PINNACLE

The core concept of successful investing is simple: Grow your savings to a point at which the interest from your investments will generate enough income to support your lifestyle without having to work. Eventually you reach a “tipping point” at which your savings will hit a critical mass. This simply means that you don’t have to work anymore—unless you choose to—because the interest and growth being generated by your account gives you the income you need for your life. This is the pinnacle we are climbing toward. The great news is that if you become an insider, today there are new and unique solutions and strategies that will accelerate your climb and even protect you from sliding backward. But before we explore these solutions in more depth, let’s map out our journey with more clarity.

There are two phases to your investing game: the
accumulation phase,
in which you are socking away money for growth, and the
decumulation,
during which you are withdrawing income.
The journey up the mountain will represent our accumulation phase with the goal of reaching the pinnacle, or critical mass. The goal is to stay on top of the mountain as long as we can. To take in the views and breathe in the fresh air of freedom and accomplishment. There will be many hurdles, obstacles, and, if you’re not alert, even lies, that will prevent you from reaching the peak. To ensure our best chance of success, we will flush these out in the pages to come.

And when we enter the second act of our life, when it’s time to enjoy what we made, we will have the freedom to work only if we want to. At this stage we will ski down the mountain and enjoy ourselves. Spending time with the ones we love, building our legacy, and making a difference. It’s during this phase that we will eliminate the number one fear of baby boomers: the fear of outliving our money. This second phase is rarely discussed by the asset management industry, which is focused on keeping money invested.