Are your investments tax efficient?

Legal Disclosure: Tony Robbins is a board member and 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 and based on increased business derived by Creative Planning from his services.

What are the qualities of an ideal portfolio? Is there a way to guarantee success?

Here’s the truth. There’s never going to be a time where you can say with absolute certainty that “this is the mix I should have for the next five or ten years.” The world changes so fast. So what do you do with your money?

There’s no single formula, no one right way to do it. But while there are many different paths to the same goal, there are also four core principles that any successful portfolio will have:

  • It will protect principal as best as possible
  • It will feature asymmetric risk and reward
  • It will be tax efficient
  • It will be well-diversified

Ultimately, you are investing for a sense of net income that gives you financial freedom, but you’re going to do it by focusing on these core principles.

Now it’s time to dig a little deeper into the “Core 4.”

Core Principle #1 – DO NOT LOSE MONEY

The single most important rule of investing is simple — do not lose money!

How do you do that? You structure your portfolio so that it can stay above water and minimize losses, even when the market dips or when you’re wrong. And you model it on some of the smartest, savviest investors in the world that have proven track records of success.

Every money master in the world, from economic powerhouse Warren Buffett to financial wizard David Swensen, will tell you that the best offense is a good defense. Sure, the point of investing is to see extraordinary returns, but you must remain laser-focused on protecting or minimizing yourself from the downside. Because if you don’t bottom out, then you live to fight another day. Think about it. If you lose 50%, then it will take 100% to even get back to where you started, and that takes something you can never recover: time.

At some point, we’re all going to be wrong. So where do we put our money? That’s where asset allocation comes in.

Think of separating your funds into two distinct investment buckets, each with their own levels of risk and reward. The first bucket is a safe environment for your money, but it is not going to grow very fast. It may not be very exciting, but that’s not the point. What matters is that this bucket gives you certainty in your life, by keeping your money, and your growth, relatively secure. That’s why we will refer to this bucket as the Security Bucket. The second bucket is more intriguing because it has the potential for tremendous growth. But, it’s much riskier, which is why we call it your Risk Bucket. And with this bucket, you need to be prepared to lose everything you put in here!

So what types of investments are more secure? Here is a look at eight basic types of assets that you may want to consider for your Security Bucket. And the one thing they all have in common? Over time, although their values may fluctuate, they are relatively secure and much less volatile than riskier assets.

  1. Cash and cash equivalents (eg, money market funds, money market deposit accounts, U.S. Treasury money market funds)
  2. Government bonds (e.g., Treasury inflation-protected securities)
  3. Certificates of Deposit (CDs)
  4. Your home
  5. Your pension
  6. Guaranteed annuities
  7. Life insurance policies (with guaranteed principal protection)
  8. Structured notes with 100% principal protection

So how much should you allocate to your Security Bucket? One-third? Half? Two-thirds? Remember, if you fail to secure a significant portion of your hard-earned money in safe investments, this can lead to financial disaster. With that said, putting too much into this bucket can really slow your growth. That’s why we supplement our Security Bucket with our Risk Bucket.

The Risk Bucket is where everyone wants to be. Why? Because the potential is huge. But the key word here is potential. While this bucket does have the potential to deliver extraordinary returns, it also has the potential to lose everything you’ve saved and invested. So remember, while there is unlimited potential for upside in this bucket, never forget that you could lose some or even all of it. The growth is not guaranteed, but the risk is!

So what types of investments do you put into this bucket? Here are a few ideas of asset classes you may want to consider:

  1. Equities (e.g., stocks, mutual funds, indexes, exchange-traded funds)
  2. High-yield bonds (e.g., junk bonds)
  3. Real estate (e.g., rentals, spec homes, first trust deeds, commercial real estate, real estate investment trusts)
  4. Commodities (eg, gold, silver, oil, coffee, cotton)
  5. Currencies
  6. Collectibles (e.g., art, wine, coins, automobiles, antiques)
  7. Structured notes with partial principal protection

Putting all of your money in the Risk Bucket is a recipe for disaster. It’s why many experts estimate that the vast majority of investors lose money over any decade. So be smart with your bucket allocations. Remember, everything in life, including markets, runs in cycles. There will be ups and there will be downs. And anyone who puts all of their money into just one type of asset is in for a rude awakening.

The key to a good night’s sleep is knowing that your investments will not only survive unstable markets, but will continue to grow in the long term, no matter what the economic conditions. By allocating your investments between the Security Bucket and the Risk Bucket, you hedge your bets against market volatility, which is unavoidable. And even in the worst case scenario, where your Risk Bucket flatlines, you still have enough life in your Security Bucket to help you continue on your way to financial freedom!

Core principle #2 – ASYMMETRIC RISK & REWARD

We have been programmed to think that the only way for us to grow our wealth involves taking huge risks. That the only option available is to grin and bear the ups and downs of the stock market, hoping we can find a way to make a “good” return. But why settle for “good” when you can get “great”? And why torture yourself with the incessant waves of the stock market when you can find an investment where you risk little, but still make a lot?

While there is no such thing as a riskless return, every money master in the world will tell you, without exception, one of the most vital components of your portfolio is to find investments with asymmetric risk and reward. They’re out there, you just have to know how to find them.

But let me qualify that this section only applies to capital which you are willing to lose; high risk capital should be a small percentage of your overall asset allocation.

One of the best times to buy is when everyone else is desperate to sell. That’s when you find the best bargains. Why? Because savvy, long-term investors know that seasons always change. What might look like a lost cause now can be acquired for a fraction of the cost that it’s ultimately worth. And at some point, that stock is bound to go back up. The general rule of thumb is that everything returns to the mean. So take advantage of stocks on the decline. Remember, no matter how cold the winter, there’s a springtime ahead.

Another way to bring asymmetric risk and reward into your investments is to use the 5-to-1 rule. The strategy here is relatively straightforward. The 5-to-1 rule means that for every dollar you risk, you have the potential to make five. What this ratio does is it allows you to have a hit rate of 20%. You can be wrong 4 out of 5 times, but as long as you are right that fifth time, you will break even. Wait a minute, wrong 80% of the time? That’s right. With a 5-to-1 approach, you can be wrong the majority of the time, you just have to be right once.

It’s all about finding ways to take small risks for big rewards. Swinging for the fences with no downside protection is a recipe for disaster. If you can learn how to incorporate asymmetric risk and reward into your portfolio, not only will you adhere to the number one rule of not losing money, you will be well on your way to creating a viable path towards financial freedom.

Core principle #3 – TAX EFFICIENCY

When it comes to our investments, we have been taught to focus on returns. But it’s not what you earn that matters, it’s what you keep. And if your portfolio isn’t tax efficient, then you may not be keeping as much as you should be.

As an investor, there are three critical taxes that you must concern yourself with.

  1. Ordinary income tax. This can be a big one. As you are probably well aware of, if you’re a high-income earner, your combined federal and state income taxes are nearing or exceeding 50%.
  2. Long-term capital gains. If you hold your investment for longer than one year before you sell, then you will pay a long-term capital gains tax, which rings in at 20%.
  3. Short-term capital gains. If you sell your investment before holding it for a minimum of one year, they will will find yourself subject to the short-term capital gains tax. And right now, the rates are currently the same as ordinary income taxes!

Between these three taxes, you can only imagine how much you could be paying Uncle Sam. And if you understand the power of compounding, then you realize how a 50% tax bite as opposed to a 20% tax bite can mean the difference between achieving your financial goals a decade early or never achieving them at all.

So how do you structure your portfolio to help reduce your tax bill and keep more of your earnings so you can compound your investments?

Defer taxes. Whenever possible, you must invest in a ways that allows you to defer your taxes. Whether you invest in a 401(k), an IRA, an annuity or a defined benefit plan, deferring taxes means you can compound tax-free and pay tax only at the time you sell the investment.

Avoid short-term capital gains. If you do choose to sell any investment held outside of a tax-deferred account, such as an IRA, make sure, if at all possible, you hold it for at least one year and one day in order to qualify for the long-term capital gains rate.

Be aware of mutual funds. Mutual funds provide a certain level of portfolio diversification that is attractive to investors. But did you know that the vast majority of mutual funds do not hold on to their investments for an entire year? And you know what that means? Unless you are holding all of your mutual funds inside your 401(k), you’re typically paying ordinary income taxes on any gains. This means you could paying as much as 35%, 45% or even 50% in income tax, which is taking a devastating hit on your compounding ability.

Consider index funds. Index funds do not constantly trade individual companies; instead, they typically hold a fixed basket of companies that charges only if the index that the fund tracks changes, which is actually quite rare. This means you get to invest in an index for the long-run, which helps you avoid getting hit by taxes each year. Instead, you are deferring the taxes, since you haven’t sold anything, and your money can stay in the fund and compound without the tax “drag” on your returns.

These are some of the simplest ways to continuously increase the real returns on your portfolio. Consult a fiduciary or a tax strategist to help you better understand all the ways you can maximize the compounding process and create more net growth in your Freedom Fund. Remember, tax efficiency equals fast financial freedom, and could save you years, or even decades.


Where to park your money and how to divide it up is the single most important skill of a successful investor. Effective diversification not only reduces your risk, it also offers you the opportunity to maximize your returns.

Wait, didn’t we already diversify between the Security Bucket and the Risk Bucket? Yes! Now it’s time to take it one step further. Now you must diversify within those buckets so that you can structure a portfolio for all seasons.

How do you do that? You take your money in each bucket and divide it among different classes, or types of investments (like stocks, bonds, commodities or real estate) and in specific proportions, according to your goals, needs, risk tolerance and stage in life.

Here’s a look at the 4 ways you must diversify:

  1. Diversify between assets within different classes (e.g., real estate, stocks, bonds, commodities, private equity)
  2. Diversify your holdings within asset classes (avoid concentrating putting all of your money into one stock or bond; you must diversify even within your asset classes)
  3. Diversify globally (e.g., markets, countries, currencies)
  4. Diversify timelines (e.g., dollar-cost averaging, maturity date)

By allocating your money to such a diverse range of assets, you will be able to set yourself apart from 99% of all investors. And the best part? It won’t cost you a dime. Because spreading your money across different investments decreases your risk, increases your upside returns over time and does not cost you anything. It’s essentially the only free lunch in town!

So don’t just invest in a random selection of stocks and bonds, invest in different types of stocks and bonds, from different markets to different parts of the world. Low-fee index funds are also one of the ultimate diversification tools. With these types of funds, you will have the broadest exposure to the largest numbers of securities for the lowest cost.

The best of the best anticipate and diversify. And they always do so with the intention of not losing money, of finding asymmetric risk and reward, and perhaps, most importantly, with creating tax efficiency.


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