The price of tea in China

Legal Disclosure: Tony Robbins is the Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.

It’s really happening — China’s stock market is starting to tumble toward a very real crash. After climbing nearly 140% over last year, shares spiraled downward by 30% last month. While the West may not be to blame, we will feel the repercussions in our pocketbooks. If world finance is a living, breathing system, investors all over the world must inoculate themselves — when China sneezes, you’ll be lucky to walk away sniffling with only a head cold.

An ounce of prevention

If China is in the midst of a bubble, as CNN Money explains, American investors need to take action. Chinese stocks aren’t being backed up by fundamentals; instead, their market has been buoyed higher and higher by government stimulus and investor frenzy. Seasoned investors know that markets can rise or fall according to a range of of economic factors: unexpected inflation or deflation, geopolitical upheaval, decline in growth or consumer confidence.

Stock market crashes and bear markets are a hazardous reality of investing — but the outcome of any portfolio will ultimately be determined by your investment decisions and the actions you take.

Don’t get pounded by the cure

You need to take action before a stock market crash, not after it.

Imagine you were facing a drop in income, sudden high-interest debt or loss of uninsured and valuable personal property — how would you rearrange your portfolio?

“Every calamity can be overcome by endurance.” — Virgil

Now, more than ever, asset allocation has become the most important investment decision you’ll make in your lifetime. You’ve taken the step to get in game, but you’ve got to keep your momentum and build the endurance to stay in play — for the long term. The principles are the same if you have $1000 or $1 million.

Asset allocation is the key skill that can set you apart from 99% of all investors and won’t cost you a dime. By spreading your money across varied investments, you decrease your risk and increase upside returns over time without costing you fees and penalties. For a more in-depth exploration of how to optimize your portfolio specifically against market dips, read our article on bull market preparedness.

Asset Allocation is the process of dividing up your money among different classes, or types, of investments — stocks, bonds, commodities or real estate — in specific proportions that you decide in advance according to your goals, risk tolerance and stage of life.

And in fact, asset allocation explains more than 100% of returns in the investment world, because of fees, taxes and losses on your profits. If you have not yet prepared your portfolio by determining the strongest asset allocation for today’s breaking circumstances, fluctuation and valuation, your entire livelihood could be teetering on the brink.

Anybody can become wealthy; asset allocation is how you stay wealthy. Remember, diversification is a process, not a one-time decision.

“Diversification is the only free lunch.” — Harry Markowitz

There are three tools you need to master for reducing your risk and increasing your potential for financial success:

1. Security selection (which stocks/bonds to pick) — Picking the next hot stock is like picking the winning horse. Instead, it makes more sense to own a basket of all of the top stocks (i.e., the S&P 500).
2. Market timing — Picking the short-term direction of the market is a fool’s errand, while the general long-term trend of markets is upgraded, with a lot of volatility in the interim.
3. Asset allocation — Your long-term strategy for diversifying investments across different asset types and classes is what will determine your success, and it’s the only one of these three that doesn’t cost anything!

Diversify or lose

Do it well and you’ll win big. Any investment you pick is going to lose half to two-thirds its value at some point.
Smart people often fail because they either panic during acceptable levels of fluctuation or, counter-intuitively, by doing the right thing at the wrong time. Buying a house can be a great investment, but in 2006 many home purchases turned out to be disasters with plummeting values submerging owners in debt.

Determining your Security/Risk ratio is the first and most important investment decision of your life. Once you know your percentage you don’t want to alter it until you enter a new stage of life or your circumstances change dramatically.

It’s time to allocate.

Asset Allocation means that from the greater sum of money you have to invest, you’re going to create three “buckets” to allot that money to. How much you choose to put into each bucket can vary depending on your personal goals, tolerance to risk and which stage of life you’re in. As outlined in Tony Robbins’ book MONEY: MASTER THE GAME, the three buckets of Asset Allocation are:

1. Safety/Security Bucket

Every smart investor begins with strong foundation; this is place of stability where you put money into investments that are known to be secure by their nature. These selections won’t generally offer huge compounded returns, but over the long-term even small returns will compound into growth — remember, your first investments MUST fill your Safety/Security Bucket. Beginning with and maintaining a bedrock of strength and durability better protects you against the uncertain outcomes of both inflation and deflation — as we’re now seeing from Asia.

Security Bucket checklist:
• Cash for 2 – 6 months, savings accounts, money market funds
• Your home, family property
• IRA, insurance, pension
• Fixed income investments with a guaranteed rate of return. This includes company or government bonds, annuities, etc…

2. Growth Bucket

This is where you, as an investor, take the most action and make your riskier moves. This is your playing field, the source of excitement and risk. Growth investments have a much greater return if the outcome is successful, but there is also a much greater chance of loss if the investment doesn’t turn out so well. Risk and reward go hand-in-hand with all investments, but in the safe-with-risks category you can explore Treasury notes and bills, FDIC insured CDs, and corporate bonds.

While designing your Growth Bucket, factor against basic risk levels: your stage in life, your tolerance to uncertainty and your available liquidity.

Growth Bucket checklist:
• Equities: stocks, ownership shares of companies and ETFs
• High-yield bonds (aka “junk bonds”)
• Real estate: rental properties, commercial property, trust deeds, senior housing, REIT (real estate investment trusts)
• Commodities (gold, silver, oil, coffee, etc.)
• Foreign currencies
• High-value collectibles (art, wine, coins, antiques, etc.)
• Structured notes with partial protection

3. Dream Bucket

These are the material things and rewards you want to achieve in life; world travel, luxury vehicles, real estate other than a first home — even owning a sports team. Anything that you don’t actually need but the idea of having fills you with excitement and passion. Your Dream Bucket represents everything that would make you feel more fulfilled toward moving from just surviving to a life of truly thriving.

No risk, no reward

Design your portfolio as a team — different players with different strengths, deployed in different areas and situations to create a win for the whole. The right mix, at the right time, with the right leadership, will ultimately bring you victory. Find the ideal blend of investments that will generate a return no matter how the market here or overseas might fluctuate.

Remember, if you put nothing, you gain nothing. You may invest and miss, but if you don’t invest at all, you’ve already lost because you’ve forfeited your chance to reap the potential rewards of intelligent investing. You’ll never have a chance to build that Money Machine, and you’ll be less likely to experience a life of greater financial freedom.

Header and article images © Erik Kalibayev/Shutterstock


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