Diversified portfolio examples: A guide to diversification

Here’s my investment portfolio:

Investments in a diversified portfolio are spread out among different asset classes. Within assets, investments are diversified even further (e.g., international vs. domestic equities). This is a solid example of a diversified portfolio.

BUT before you start trying to match my portfolio, you need to know one thing: My financial situation is, in all likelihood, VASTLY different from yours.

If you want your own diversified portfolio tailored to your specific financial situation, I can help you do that. I’ve helped thousands do it through my New York Times best-selling book already.

Let’s get started by taking a look at what being diversified actually means and how it can help protect you from the whims of the financial markets.

The importance of asset allocation and being diversified

Imagine two farmers: Olivia and Andrew.

Both are the same age and each has bought a hundred acres of farmland.

Andrew decides to grow corn (and only corn) on his land. He dedicates 100% of his acreage to the one crop. As such, his initial season brings him in a good amount of money since there are plenty of people who want corn.

Olivia also grows corn, but only dedicates 50% of her land to the crop. With her other acres she grows soybeans, alfalfa, and even a pumpkin patch (for the lattes, of course). Her initial season is profitable, but not as much as it’d be if she only sold corn.

But then comes a blight. This blight affects only corn crops, leaving them dried out and inedible.

Though half of Olivia’s crops die, she still has plenty of crops not affected by the blight. Things will be harder for her going into the next season, but she will be able to support herself.

Andrew, however, can only watch in dismay. All of his crops die along with his livelihood. He’s forced to move back to his parents’ house and finds a new “job” selling his hair online.

The difference between the two? Olivia diversified while Andrew didn’t.

This is what it means to diversify your portfolio — to vary your investments so you hedge your losses while maximizing your earning potential.

You can use asset allocation and diversification to do this.

This is how much money you invest into certain asset classes in your portfolio, the major ones being:

• Stocks and mutual funds (“equities”). When you own a company’s stock, you own part of that company. These are generally considered to be “riskier” because they can grow or shrink quickly. You can diversify that risk by owning mutual funds, which are essentially baskets of stocks.
• Bonds. These are like IOUs that you get from banks. You’re lending them money in exchange for interest over a fixed amount of time. These are generally considered “safer” because they have a fixed (if modest) rate of return.
• Cash. This includes liquid money and the money that you have in your checking and savings accounts.

Remember: These asset classes are just broad categories. For example, stocks actually include many different varieties such as large-cap stocks, mid-cap stocks, small-cap stocks, and international stocks.

And none of them perform consistently. For example, financial theorist William Bernstein once noted that U.S. large-cap stocks gained 28.6% while real estate stocks lost 17% in 1998…

…but just two years later, U.S. large-cap stocks lost 9.1% while real estate stocks gained 31.04%.

Similarly, different types of bonds offer different benefits including rates of return and tax advantages.

The fact that performance varies so much in every asset class means two things:

1. If you’re investing to make money fast, you’re probably going to lose. This is because you have no idea what will happen in the near future. Anyone who tells you they do is lying.
2. You should own a variety of assets in your portfolio. If you put all your money in U.S. small-cap stocks and they don’t perform well for a decade, that would really suck. Instead, if you owned small-cap, large-cap, with a variety of bonds, you’re more insured against one investment dragging you down.

Just like Farmer Andrew, you don’t want to devote all your land to one crop. That’s why you want your asset allocation in check by buying different types of stocks and funds to have a balanced portfolio — and then further diversifying in each of those asset classes.

A 1991 study discovered that 91.5% of the results from long-term portfolio performance came from how the investments were allocated. This means that asset allocation is CRUCIAL to how your portfolio performs.

Now that you know the basics of asset allocation and diversification, I’m going to give you one diversified portfolio example you can base your portfolio on AND give you a look into my own portfolio.

Diversified portfolio example #1: The Swensen Model

David Swensen runs Yale’s fabled endowment, and for more than 20 years he generated an astonishing 16.3% annualized return — while most managers can’t even beat 8%. That means he’s DOUBLED Yale’s money every four-and-a-half years from 1985 to today.

Best of all, Swensen is a genuinely good guy. He could be making hundreds of millions each year running his own fund on Wall Street. Instead, he chooses to stay at Yale, making just more than $1 million per year because he loves the school and academia.

“When I see colleagues of mine leave universities to do essentially the same thing they were doing but to get paid more, I am disappointed because there is a sense of mission,” he’s said.

I LOVE this guy.

Aside from being a total A-player for Yale, he also has an excellent suggestion for how you can allocate your money using the following model:

ASSET CLASS	% BREAKDOWN
Domestic equities	30%
Real estate funds	20%
Government bonds	15%
Developed-world international equities	15%
Treasury inflation-protected securities	15%
Emerging-market equities	5%
TOTAL	100%

What do you notice about this asset allocation?

No single choice represents an overwhelming part of the portfolio.

As illustrated by the tech bubble burst in 2001 and also the housing bubble burst of 2008, any sector can drop at any time. When it does, you don’t want it to drag your entire portfolio down with it. As we know, lower risk generally equals lower reward.

BUT the coolest thing about asset allocation is that you can actually reduce risk while maintaining a solid return. This is why Swensen’s model is a great one to base your portfolio on.

Now let’s take a look at a more advanced and handsome investor…

Diversified portfolio example #2: Ramit’s diversified portfolio example

This is my investment portfolio. I spent quite a while getting it right, but once it’s set, you don’t have to change it often.

The asset classes are broken down like this:

ASSET CLASS	% BREAKDOWN
Cash	0.93%
Angel investments	12.10%
Mutual funds	65.53%
Stocks	11.48%
Bonds	8.50%
Short-term reserves	1.46%
TOTAL	100%

Let me provide three pieces of context so you understand the WHY behind the numbers:

Lifecycle funds: The foundation for my portfolio

The majority of my investments are in lifecycle funds (aka target date funds). 

Remember: Asset allocation is everything. That’s why I pick mostly target date funds that automatically do the rebalancing for me. It’s a no-brainer for someone who:

1. Loves automation.
2. Doesn’t want to worry about rebalancing a portfolio all the time.

They work by diversifying your investments for you based on your age. And, as you get older, target date funds automatically adjust your asset allocation for you.

Let’s look at an example:

If you plan to retire in about 30 years, a good target date fund for you might be the Vanguard Target Retirement 2050 Fund (VFIFX). The 2050 represents the year in which you’ll likely retire.

Since 2050 is still a ways away, this fund will contain more risky investments such as stocks. However, as it gets closer and closer to 2050, the fund will automatically adjust to contain safer investments such as bonds, because you’re getting closer to retirement age.

These funds aren’t for everyone though. You might have a different level of risk or different goals.  

However, they are designed for people who don’t want to mess around with rebalancing their portfolio at all. For you, the ease of use that comes with lifecycle funds might outweigh the loss of returns.

For more information on lifecycle funds, check out my three-minute video on the topic below.

Minimal speculative investments

Speculative investments are dangerous. 

These are investments that have the potential to earn a lot of money but also have the potential  to lose big.

For example, when I just started out, I bought a bunch of stocks because that’s what I thought investing was. And there were three tech companies that I initially invested in. Two of them ended up going bankrupt — but I also bought stock in a little company called Amazon.com.

Guess what? I made a good amount of money off of that investment … and it’s not because I was smart. I was stupid. I just got incredibly lucky.

The lesson here isn’t “find the next Amazon.” It’s that you don’t know how to get lucky. I happened to stumble on dumb luck.

It’s possible that the next hundred companies I invested in went belly up because speculative investing is total gambling.

That isn’t to say that I’m totally against investments like buying individual stocks. In fact, I keep 10% – 20% of my portfolio for things like individual stocks and angel investments (very risky). But that’s all play money, or cash I’m willing to lose.

If you want to play the market, go ahead! Just make sure you have your foundation set up first — that means automated finances, and regular investments into mutual funds — and that you’re investing with money you’re willing to lose.

Savings held separately

The above is just my investment portfolio — it doesn’t reflect certain assets like my savings and sub-savings accounts.

This includes money I’ve saved up for my wedding, engagement ring, and even vacations.

My savings accounts used to look like this

Here’s an example of a couple sub-savings accounts I have now:

ING switched to Capital One 360, and I used the money I saved to buy an engagement ring

I also have an emergency fund with six months’ worth of living expenses in it. This is money stowed away in case of financial emergencies. I want to make sure I have money in the bank when these things happen so I don’t have to worry about supporting me or my family if things go wrong.

To find out how much you need in your emergency savings fund, you simply have to take into account three to six months worth of:

• Utility bills (internet, water, electricity, etc.)
• Rent
• Car/home payments
• Food/groceries

ANY living expense that you have should be accounted for.

You should also start an account exclusively for your emergency savings fund. When you do, you can start putting money into the account through my favorite system: Automating your personal finances.

The process only takes one to two hours at the most, but once you set it up, you don’t have to worry about it again.

AND it’ll save you thousands of dollars over your lifetime.

Here is a 12-minute video of me explaining the exact process I use below.

Why you shouldn’t use my portfolio

Like I mentioned above, this portfolio is tailored to my specific financial situation. Yours is going to be completely different from mine. As such, you’ll want to find a mix that works for you.

In my early days, I was solely focused on growth. Since my business has grown, I’ve had to adapt my investing strategy: I’ve intentionally made my portfolio more conservative.

If you’re young and just getting started, you’re probably going to want to be more aggressive since you’re better positioned to risk more — sensibly. (More on this in my book.)

No matter what, you still want to make sure you’re diversified to help safeguard yourself against the worst financial situations.

That’s why I spent years getting my asset allocation right — and that’s why I’m happy you’re here.

If you’re interested in things like diversifying your portfolio, I want to give you something that can help you start building that portfolio today.

The Ultimate Guide to Personal Finance

In it, you’ll learn how to:

• Master your 401k: Take advantage of free money offered to you by your company … and get rich while doing it.
• Manage Roth IRAs: Start saving for retirement in a worthwhile long-term investment account.
• Spend the money you have — guilt-free: By leveraging the systems in this book, you’ll learn exactly how you’ll be able to save money to spend without the guilt.

Enter your info below and get on your way to living a Rich Life today.

Diversified portfolio examples: A guide to diversification is a post from: I Will Teach You To Be Rich.

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DIY Discount Brokerage Investing vs Robo Advisors

You had good intentions when you were making that New Year’s Resolutions list. When you wrote down “figure out money and investment stuff”, you thought that it might take a couple of nights of upgrading your Google-Fu, but eventually, you’d wrap your head around how to handle your own money. It can’t be that hard – or they’d teach it in school, right? Unfortunately, it’s at this point in the process that most Canadians fall off of the “I’m going to control my investments” bandwagon. Perhaps you read a few blog posts about bonds, stocks, and ETFs?  Maybe they linked to comparisons of strategies such as dividend investing, value investing, or the interestingly-named couch potato investing?  You had good intentions to come back to this and take action, but after reading 47 blog posts and two recommended personal finance books, you feel good about the learning, but possibly worried that […]

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House poor: How two homes caused enormous debt

David Domzalski was just beginning to process the ultrasound images of his first son when his wife told him that she wanted to be a stay-at-home mom.

This meant becoming a one-income house, and that meant their debts would take longer to pay off.

It also meant the young family would soon be house poor.

House poor means that the majority of your income is going towards your home’s mortgage, utilities, repairs, etc. — leaving little money for other expenses such as the phone bill, groceries, and, well, everything else.

You might be rolling your eyes right now and saying to yourself, “You gotta be kidding me! Why would anyone put themselves in such a bad financial situation for a house? That’s ridiculous!”

It’s not that simple.

Being house poor is like being in a crappy relationship. It’s so easy to judge and scoff at things like, “Ugh they are so bad for each other. If they just broke up, they’d be WAY happier.”

But when you’re the one in the relationship, it’s an entirely different story. You’re almost blind to the reality around you. You’re more willing to bury yourself in excuses like:

• “Maybe things will change if I just keep working hard at it.”
• “I’m committed. I can’t give up now!”
• “What if I never find another as good again?”

And sometimes all we see is the picturesque Norman Rockwell version of things when reality is much more painful.

(I apologize for any high school relationship flashbacks I triggered.)

There are a lot of reasons someone ends up house poor. Luckily, there are also a lot of ways one can recover from being house poor. That’s why we talked to two people who have first-hand experience — a college professor who’s currently house poor and a new father who recently got out.

Their insights were haunting, painful, and incredibly revealing — and they shed light on a topic many people would rather not talk about.

But, c’mon, this is IWT. We’re going to talk about it.

The house poor professor who spends half his pay on his home

Shaun / 35 / Utah

• Occupation: College professor
• Current income: $44,000 / year
• Family: Married, 3 children
• Wife’s income: $8,000 / year
• Purchase price of home: $189,000
• • Mortgage: $1,153/month, 30-year fixed rate
  • Loan after consolidation: $199,000

Shaun is a college professor from a small Utah town. He and his family had been renting a home for a few years before his friend approached him one day with a question: “Do you want a house?”

They found the five-bedroom home attractive and they also received a great deal on the home at $189,000 (in a state where the median price of a home is nearly $300,000).

It all made logical sense to Shaun.

“We figured that we could pay someone else’s mortgage by renting or we could pay our own,” he recalls. “That was a basic thought for me: I can just pay my own [mortgage] and it would put equity towards the house even though it’s a small amount.”

Shaun fell into a trap that many homeowners ensnare themselves in by discounting the phantom costs of owning a home. Soon he’d find himself parting with a considerable slice of his paycheck because of his house.  

He adds, “Plus the place where we were staying had just risen their rent … so we went for it.”

And so Shaun bought the house and got a 30-year fixed rate mortgage at 4.125% interest.

“When my wife and I looked at the house, we thought that we weren’t going to get another deal like this,” Shaun says. “It was a brand new home and it was well built. We loved all the little features so we were okay with putting our money there.”

“Ramit’s not big on owning a home … and I can see why.”

Shaun’s wife also works as a professor. However, she makes $36,000 less than Shaun because she only works part time. Because of this, the family must rely on Shaun’s income to pay off the mortgage. (Luckily, the mortgage is the only big loan the family has as Shaun recently paid off his education loans.)

Unluckily, half of Shaun’s take-home pay goes towards the mortgage. And when half of your salary is fed to the house, that means that you must be a lot more judicious with how you spend your money.

“We have set things we know we have to pay for,” Shaun says. “We’re not the type to scramble to find out how we’re going to pay for things each month. We know exactly what we need to pay for utilities and the mortgage. So we have discretionary spending. It’s just a set amount.”

But still, it’s not easy watching the hit in his pay each month. It means forgoing many different things that Shaun wants to do but cannot because of his financial situation.

“I’d love to be able to pay for my parents’ home,” Shaun says, “contribute to their retirement income, and help family and friends financially when they need it. [Also] I’d like to buy a vehicle for my family that doesn’t require the cramming we currently experience with a baby seat, a toddler chair, and a booster seat all vying for limited space in a compact car.”

He continues, “It’s tough. I look at my paycheck and say, ‘Most of this is a wash. It’s already spoken for!’ Half of it goes towards the house and utilities and all the other things that come with the house. Ramit’s not big on owning a home and I can see why.”

Shaun’s house poor escape plan

To get out of being house poor, Shaun is employing several tactics:

• Paying more money each month for the mortgage
• Refinancing the home
• Earning more money

“We’re going to pay [the mortgage] off a lot faster than what it’s scheduled to be,” he says. “So instead of 30 years it’s at about 18 years.”

Shaun also refinanced the home. If you don’t know what that is, it’s okay. Refinancing is like getting a new loan. It allows the borrower to get a new appraisal on the house and can result in some big wins like a lower interest rate and higher home value.

And that’s exactly what happened for Shaun.

“We got [appraised] for $189,000 originally,” Shaun says. “But with our refinance, it appraises higher now at $250,000. We also got a lower interest rate. It wasn’t a massive change, but it was enough to knock off a few hundred dollars a month.”

He adds, “Luckily, now the house is worth more than what we owe on it so we’re not underwater.”

Shaun also took up another job as a DJ for his local radio station to help offset the cost of the mortgage.

“It’s not a big money maker — just $13 an hour,” he says. “But I love it and it helps with our expenses. It’s a few hundred bucks a month for a few hours. It helps to pay off more principal on the house and helps us get out of it sooner.”

Shaun doesn’t think his family will stay in the home forever — but, for now, he’ll be paying down that mortgage as best he can. Now, let’s take a look at someone who has been in Shaun’s shoes BUT has gotten out of it …

The finance junkie who escaped being house poor

David / 33 / Pennsylvania

• Occupation: Auditor
• Income when house poor: $80,000 / year
• Family: Married, one child (another on the way)
• Price of old home: $450,000
  • Mortgage: $2,200/month 30-year fixed (2011 rates)
• Price of current home: $350,000
  • Mortgage: $1,300/month 30-year fixed (2016 rates)

David Domzalski is an auditor — and also the founder and writer of the blog Run the Money.

So it’s a little ironic that he found himself being house poor despite such a strong background in finances.

“Being house poor was one of the main reasons I wanted to start Run the Money last year,” David says. “It was such a huge experience. It consumed our lives.”

It all started when David and his wife got married and decided to purchase a house in Newtown, Pennsylvania, in 2011. At the time, it seemed perfect. They could both afford it on his salary as an auditor and his wife’s salary as a teacher. Plus, it was in the Philadelphia area where David grew up.

“It was the best house we could afford,” he recalls. “We were so proud of that home — just patting ourselves on the back. We were cocky twenty-somethings and just really excited about it, you know?”

They were young, optimistic, and saw that house as their own quarter-acre slice of the American dream. It wasn’t just a house. It was a badge of honor. Their signal to the world that they had finally made it.

They loved this house.

David and his family.

“It was our first house together,” he says. “We worked our butts off to save for it. When we got it, it was us signifying to the world that we had arrived. And we really felt like we did it. We had a beautiful street in a beautiful neighborhood. It was everything that we wanted. It was just ours. We felt that we had accomplished something that no one could take away from us.”

After purchasing it, the two moved in and started turning a house into a home — painting the rooms, laying down hardwood floor, and putting in “a lot of blood, sweat, and tears” to make the house truly theirs. You know, everything you see on HGTV. 

A few years later, though, David and his wife came to a decision that wound up entrapping the family into an ever-tightening financial vice.

When two incomes turn to just one

“I’m done. I’m not working anymore.”

That’s what David’s wife told him in March 2015. The two were sitting in their car after just seeing the first ultrasound images of their unborn son.

By this time, his wife switched careers and worked in real estate. She was pulling in $75,000 a year while David made $80,000, allowing the two to live comfortably.

But when she saw the first images of her son, she made the decision to stay at home to support her child.

“I just told her, ‘Okay.’ I fully supported my wife being a stay-at-home mom,” David says recalling that fateful moment. “Looking back now, it was definitely the right decision because my son is one of the happiest kids you’ve ever seen. But at the time, it put us in a bind.”

Part of that bind included roughly $30,000 in credit card debt. With a child on the way and the family turning to a single income, there was no way they were going to be able to pay it down anytime soon.

And then there was the mortgage payment for their home. What was once a marker that the couple had “made it” soon became a painful weight on their shoulders.

“We had the credit card debt on top of the $2,200 a month we were paying [for the mortgage],” David says. “I was making only about $80,000 a year. So it was probably close to half our income with just me working.”

Determined to keep the home, the couple began to look for solutions. His wife’s real estate business still had a few deals left, so they were able to take advantage of the extra income. They also refinanced the home twice but the payment was still sitting at $2,200 a month.

“For some people, [$2,200 a month] isn’t a big deal. But for us, it just wasn’t going to work,” he says. “We lived in such an expensive area. It was a place where you have to have two incomes or I had to get a higher paying job that required me to travel to New York every day. And that’s something I just didn’t want to do.”

He adds, “I value the time I have with my family much more than making the ‘big bucks.’”

Unless they did something soon, the young family faced insurmountable debt and even foreclosure.

“I cried.”

David and his wife began to discuss their options — including the possibility of selling their house.

“There were a lot of late nights,” he says. “A lot of car rides where we just discussed it. We knew our situation meant making decisions we didn’t want to make. And we ran the numbers every way you can think of too. We tried every way to keep us in that home and it just wasn’t going to work.”

The two looked at areas where they could cut their spending. They made their budget a priority. They considered cutting luxuries like cable and selling their car.  

Meanwhile, the couple ran the numbers constantly, trying to untangle the Gordian knot of their financial debt. It went on this way for months.

His son was eventually born before they came to the only logical conclusion: They had to sell their dream home.

“There was no way we could do it,” David says. “So we kicked off the process of moving out.”

The family put their house on the market and began the search for a new home on the weekends. Throughout it all, the feeling of despair and the ever-present pang of nostalgia were always close by.

“When I realized we had to do this, and I put in for the transfer [at work], and we had the house we loved on the market, I cried,” David recalls. “We loved that house.”

He continues, “On our last night in the house, my wife and I walked to each room and we said all the memories we had for that specific room. It meant that much to us.”

What “adulting” looks like

So the family moved out and stayed with David’s in-laws until they found another home two hours away in Gettysburg, Pennsylvania.

While it isn’t exactly like their former house, the home and neighborhood did provide a number of benefits, including:

• Lower cost of living. The house they bought ended up being roughly $100,000 less than their old house. The monthly payment is almost $1,000 less as well.
• Close proximity to his in-laws. David’s wife’s parents live a short drive away from the home, which is fantastic in case of emergencies. “Fortunately, we were able to move to an area where my wife’s parents are just 45 minutes away and we have their help,” he says.
• Great job benefits. With his job transfer, David was also able to negotiate a pay raise including telecommute days and the occasional Friday off — which means even more time to spend with his son.

After moving into the new home, the couple began to pay down their debt. With his wife taking on a consulting gig and David building out his side hustle in Run the Money, they were able to finally take control of their finances again.

“That’s what ‘adulting’ looks like,” he says. “It’s making decisions and sacrifices like this — and I would do it again.”

The family is almost two years into their new home, and while they miss their old house, they wouldn’t trade their current situation for the world.

“It’s amazing how it all worked out,” he says. “We’ve been really blessed. It was a difficult situation but it goes to show you that sometimes those situations you go through in life are all about taking that leap of faith. We all want things to go well. Sometimes it doesn’t, but for us, it couldn’t have worked out better.”

David adds, “I get to be home with my son and daughter. They get to grow up in a beautiful neighborhood, and it’s all because Mom and Dad made an #adulting decision.”

What to do if you’re house poor

If you’re house poor too, you’re not alone. 44% of Americans are “liquid-asset poor,” according to a study by Prosperity Now Scorecard, a nonprofit dedicated to affecting economic policy change to “rebuild prosperity in America.”

But, as evidenced by Shaun and David, there is hope. While these two homeowners are separated by over 2,000 miles and make different salaries, they both made one key decision to help them stop being house poor: They found ways to earn more money. 

And if you’re house poor, there’s a wealth of systems you can employ to help you earn more today. That’s why we want to offer something to help you out:

The Ultimate Guide to Making Money

In it, we’ve included our best systems to:

• Create multiple income streams so you always have a consistent source of revenue.
• Start your own business and escape your dire financial situation.
• Increase your income by thousands of dollars a year through side hustles like freelancing.

Download a FREE copy of the ultimate guide today by entering your name and email below — and start working your way out of being house poor today.

House poor: How two homes caused enormous debt is a post from: I Will Teach You To Be Rich.

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The gift you really wanted, on your budget

If you’ve ever bought or sold second-hand clothing, electronics, furniture, video games, toys, or anything else, you’ve participated in the second-hand economy. And you’re not alone! 82% of Canadians traded at least one good through the second-hand economy in 2016. When most people think of the second-hand economy, they think they can utilize it to drum up extra cash to use towards a financial goal, usually with the added benefit of de-cluttering their home at the same time. It’s also a great way to save money on an item you would like to own, but is out of your budget at its regular retail price. But there is one way use the second-hand economy in order to get the brand-new items you want, especially, right after the holidays: gift cards. Whether you want to do a little discount shopping for yourself, or you want extra cash on hand, Kijiji is […]

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How to get out of debt fast in 5 steps

Debt sucks. There’s no way to sugar-coat it.  

And if you’re one of the 80% of Americans who is in debt, it’s hard for you to even begin to consider investing or saving your money.

That’s because debt is the most common roadblock keeping people from living a Rich Life — preventing them from being able to enjoy themselves and the money they have.

That’s why it’s important for you to learn how to get out of debt as fast as possible so that you can focus your energy on earning and investing instead of worrying about whether or not you can make your next payment.

That’s why I crafted a five-step system to help you do just that. It’s the same one that has helped THOUSANDS of people get out of debt faster than they thought possible:

Step 1: Find out how much debt you have

Step 2: Decide what to pay first

Step 3: Eliminate temptation

Step 4: Negotiate a lower interest rate to save thousands

Step 5: Decide how you’re going to pay off your debt

Bonus step: Live a Rich Life

WARNING: Getting out of debt isn’t easy. Hell, this might be one of the hardest things you ever do. But it is possible — and I’m here to help you.

To understand this system, we need to first take a look at the two most common types of debt and the mindset to approaching them.

The two most common types of debt

Statistically speaking, being in debt is normal. 73% of Americans actually die while in some form of debt.

Holy crap, that’s depressing. Here’s a GIF of a high-fiving puppy to cheer everyone up.

Phew! There. That’s better.

It is possible to learn how to get out of debt — even if you owe a large amount. Lots of people have gotten out of debt using the system we’re about the share.

And if you really think about it, is it really normal to owe more than you have? Maybe for certain things, like a house or education, but what about for smaller random purchases on a credit card?

Some people differentiate debts by calling them “good debt” and “bad debt,” depending on if the debt appreciates (education) or depreciates (car) over time. Others despise debt altogether. Whatever the case, most of us have a lot of it and it doesn’t feel good.

And the two largest types of debt most twenty- and thirty-somethings face are student loans and credit card debt. Together they make up a debilitating albatross around the collective necks of the nation’s debtors.

Let’s take a look at both and the mindset you can use to learn how to get out of debt:

1. Student loans

I’m not going to lie to you: Getting rid of student loan debt is hard. The average student graduates with $30,100, but I have friends who have more than $100,000 in loans to pay off.

Unfortunately, it’s not like you can wave a magic wand and make it disappear. In fact, even if you declare bankruptcy, you may still have to pay your student loans.

However, there is good news: It doesn’t matter how much debt you have as long as you pay attention to how much money you’re putting toward the monthly payments (more on that in a bit). Understanding this can do a HUGE amount of good psychologically when you start strategically paying it down.

2. Credit cards

Just like gaining weight, most people don’t get into serious credit card debt overnight. Instead, things go wrong little by little until one day you wake up the size of a VW Beetle covered in McDonald’s wrappers.

And if you’ve ended up in credit card debt, it can seem very overwhelming. It’s like when you watch Dr. Phil and wonder why those people can’t figure out their own problems when the answer seems so clear from the outside.

“Yes, you should leave him! He hasn’t had a job for the last eight years! And he’s cheated on you!”

But when we’re faced with the same problems, it doesn’t seem so simple.

The good news is that credit card debt is almost always manageable if you have a plan and take disciplined steps to reduce it. Yes, it’s hard, but you can get out of debt.

We’re going to be focusing more on these two types of debt in this article, but the lessons here can show you how to get out of debt such as your home mortgage or car loan.

Let’s jump into it.

How to get out of debt fast

Step 1: Find out how much debt you have

You wouldn’t believe how many people don’t take this step and continue blindly paying off any bills that come in with no strategic plan.

This boils down to the fact that people feel guilty about their debt. They’d rather bury their heads in the sand than look at the reality of the situation and do something about it.  

This is exactly what credit card/loan companies want — for you to hide from your statement every month and just blindly send them the minimum payment thinking you’re getting out of your debt. They LOVE it when you do that.

The reality is that minimum payments dig your hole even deeper.

It might be painful to learn the truth but you have to bite the bullet. Then you’ll see that it’s not hard to end this bad habit. In fact, you can get the credit card companies to help you. Just look at the back of your credit cards for their number, call them, and ask them for the amount of debt you owe, the APR, and the monthly minimum payment on the card.

I challenge you now to step up and own your debt. You can do the hard work now, or the impossible work later.

You can use this tool to track it (it’s the second link on this list). The chart looks like this:

It’ll help you find out how much you owe to each company and what your interest rates are. You can also use my free online tool here.

Stop right now and do this.

Done?

Congrats! Taking the first step is one of the hardest parts — now you’re well on your way to a Rich Life.

If your total debt number seems high, remember two things:

1. There is a large group of people with MORE debt than you.
2. From this day that number is only going to go DOWN. This is the beginning of the end.

Once you know how much you owe, the next step in learning how to get out of debt is …

Step 2: Decide what to pay first

Once you know exactly how much you owe, you’re ready to strategically attack your debt.

To do this, you need to prioritize which of your debts you’re going to pay off first — whether it be your credit card, student loans, whatever — based on the interest rate.

You’re going to want to pay off the loan with the highest interest rate first.

For example, let’s say Credit Card A has a balance of $1,000 and a 12% interest rate, and Credit Card B has $1,500 at 6% interest. You put down $150 total every month, paying the minimum payment (3%) on one and whatever’s left on the other. You’re going to save more money by eliminating Credit Card A first ($147 in total interest) vs Card B ($188).

Once you’ve decided what you should prioritize, it’s time to come up with a plan of attack.

When it comes to your student loans, you can actually save thousands of dollars each year — by paying down your debt more each month.

Yes, you read that right. You can save money by spending MORE.

Let’s say you have a $10,000 student loan, at a 6.8% interest rate, and a 10-year repayment period.

If you go with the standard monthly payment, you’ll pay around $115/month.

But check out how much you can save per year if you paid just $100 more each month:

Like I said before, paying the minimum digs you into a bigger hole. Even $20 more per month can save you huge amounts of money.

I’ve written about this before and linked to two great articles regarding the tactic. If you can contribute even a small amount more per month, the benefits can be significant. See for yourself by calculating your savings using this calculator.

Alternatively, you can use the “debt snowball” method, which I explain here (at around 2:00):

Step 3: Eliminate temptation

If you ever expect to pay down your debt, you can’t add more to it.

That’s why you need to do the following things:

1. Take out your wallet.
2. Dump out all your credit cards.
3. Mail them all to Antarctica.

Well, maybe you don’t have to be that extreme … but the point is to remove all temptation of ever using your credit cards again until you’re out of debt.

Here’s my favorite tip: plunge your cards into a bowl of water and shove it all into your freezer.

Seriously.

Once you literally freeze your credit, you’ll have to chip away at a massive block of ice in order to get it back — giving you time to think about whether or not you want to go through with whatever purchase you were going to make.

Alternatively, you can lock them in a safe or have a friend/parent/sibling/whoever-you-trust hold on to them for you. As long as you’re not adding more to your credit card debt, any method is good.

Step 4: Negotiate a lower interest rate to save thousands

Not many people realize this, but you can actually save over $1,000 in interest with a single five-minute phone call.

Through simple negotiations, you can lower the APR on your credit card and put thousands of dollars back into your pocket.

I LOVE negotiating interest rates.

It can be crazy simple too — in fact, here’s a word-for-word script that many of my readers have used already to lower their interest rates:

YOU: “Hi, I’m going to be paying off my credit card debt more aggressively beginning next week, and I’d like to lower my credit card’s interest rate.”

CC REP: “Uh, why?”

YOU: “I’ve decided to be more aggressive about paying off my debt, and that’s why I’d like to lower the interest rate I’m paying. Other cards are offering me rates at half what you’re offering. Can you lower my rate by 50% or only 40%?”

CC REP: “Hmmm…After reviewing your account, I’m afraid we can’t offer you a lower interest rate.”

YOU: “As I mentioned before, other credit cards are offering me zero percent introductory rates for 12 months, as well as APRs that are half what you’re offering. I’ve been a customer for XX years and I’d prefer not to switch my balance over to a lower-interest card. Can you match the other credit card rates, or can you at least go any lower?”

CC REP: “I see … Hmm, let me pull something up here. Fortunately, the system is suddenly letting me offer you a reduced APR. That is effective immediately.”

It’s really that simple to save money in five minutes.

Make the call, and if you’re successful, do two things:

1. Celebrate your accomplishment (this is a big deal).
2. Make sure to adjust your debt chart from step one. You get to chop that big ugly interest rate down and lower your monthly payments.

Repeat this process for any other cards you can, and then move on to my favorite step.

Step 5: Decide how you’re going to pay off your debt — and use Hidden Income to do it

If you’ve followed along this far, you’re probably thinking, “This is great and all, but where do I get the money to pay down all these bills?”

I recommend four things:

1. Use the cash you’ve freed up from Step 4
2. Use money you have from your Conscious Spending Plan (this is how my friend spends over $21,000 a year on going out)
3. Tap into Hidden Income
4. Earn more money

I’ve already explained how to get cash from lowering your interest rates and you can learn more about creating a Conscious Spending Plan here.

Now, I want to show you how to get money with methods that’ll push your self-development to the next level and build a foundation for your Rich Life.

Tapping into Hidden Income

Instead of strict budgets or extreme frugality, I prefer to cut costs mercilessly on everyday bills. These are things like your cell phone, car insurance, and other monthly expenses.

Saving money on these everyday items is an easy way to free up cash to put toward your debt. The cool thing is, we can show you how to save $1,000 in a week — without cutting back on the things you love — like these people did:

It’s a great way to focus in on your willpower and expand your knowledge on how you spend money.

Try the challenge and see how much money you could put toward your next debt payment.

Earn more money

I’ve always believed that there’s a limit to how much you can save but no limit to how much you can earn.

What does that have to do with paying off debt? Well, imagine having an extra $1,000/month (or more) that you could put toward your bills.

The best part: it’s far easier to earn $1,000 than to slash $1,000 from your budget.

Just a few examples of ways to earn more money:

• Get a $5,000 raise with a simple, 15-minute conversation with your boss.
• Earn $1,000, $2,000, even $5,000 or more on the side, every month, while still keeping your day job.
• Or — this is my favorite option — you could give yourself ultimate freedom and unlimited earning power with an online business.

Whatever you choose, the rewards can be huge and make a significant dent in your debt today.

Getting out of debt quickly is one of the best financial decisions you’ll ever make.

And earning more money is the secret weapon for paying down your debt as fast as possible.

A note on student loan debt

If you find that no matter how you run the number you’re not going to be able to pay your student loans off in any reasonable amount of time, it’s time to call your lender.

Look at the phone number on that monthly bill staring you down. Call them up and ask for their advice.

Seriously, I can’t emphasize this enough. Your lenders have heard it ALL, from “I can’t pay this month” to “I have five different loans and want to consolidate them.”

For your purposes, ask the following:

• “What would happen if I paid $100 more per month?” (Substitute any number that’s right for you.)
• “What would happen if I changed the timeline of the loan from five years to 15 years?”
• If you’re looking for a job, you might ask, “What if I’m looking for a job and can’t afford to pay for the next three months?”

Your lender has answers to all these questions — and chances are they can help you find a better way to structure your payment. Typically, they’ll help you by changing the monthly payment or the timeline. Just think: With that one call you could save thousands of dollars.

Wipe out your debt — and live a Rich Life

Once you’ve eliminated your debt, congratulations!

You’ve not only beat a system designed to keep you drowning in debt, but you’ve also gained valuable knowledge and skills you can take with you on your journey to living a Rich Life.

But learning how to get out of debt is just the first step on that journey.

Download a free copy of my Ultimate Guide to Making Money to learn my best strategies for creating multiple income streams, starting a business, and increasing your income by thousands of dollars a year.

Just enter your name and email below to get instant access to the Ultimate Guide to Making Money.

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How to improve your credit score in 4 systems

Improving your credit score is potentially worth nearly $100,000.

Consider two people:

• Abby, who has great credit (760)
• Derek, who has poor credit (620)

In their 30s, they decide to buy houses of similar prices. How much do you think they each pay?

Spoiler alert: Not the same amount.

Check out the graph below:

Source: MyFico.com. Data calculated in June 2017.

Because Derek has poor credit, he’ll end up paying nearly $68,000 more in interest than Abby — whose credit is awesome.

Don’t be like Derek. Instead, be like my readers who improved their credit scores by listening to some Indian dude online:

Improving your credit score can seem like an incredibly daunting task — but it’s actually pretty straightforward as long as you have the right systems in place.

And in a world where nearly 110 million Americans have NEVER even checked their credit score, making sure you have a good one will put you ahead of the curve when it comes to things like attaining a home mortgage, refinancing your student loans, buying a car, or even renting an apartment.

It’s also an incredibly easy way to get started on earning a Big Win. That’s because credit has a far greater impact on our finances than saving a few dollars a day on a cup of coffee.

Luckily, we have the exact systems to help you get started improving your credit score. They are:

• Get out of debt fast
• Automate your credit card payments
• Keep your accounts open — and put a recurring charge on them
• Get more credit — but only if you have no debt

To understand why these systems work, you need to first know how your credit score works.

(If you already know how credit scores work, click here to jump down to the systems.)

Before you improve your credit score…

There are two main components to credit history:

1. Credit report. This is an all-inclusive report that potential lenders (i.e. people considering lending you money for things like cars and homes) use to gain basic information about you, your accounts, and your payment history. This report tracks all credit-related activities, although recent activities are given a higher weight.
2. Credit score. This is often called your FICO score because it was created by the Fair Isaac Corporation. It’s a single number between 300 and 850 that represents your risk to lenders. Think of it like the SparkNotes of your credit history. The lenders look at this number along with other pieces of information such as your salary and age to decide if they’ll lend you money for credit like a credit card, mortgage, or car loan. They’ll charge you more or less for the loan depending on the score, which signifies how risky you are.

And while your credit score and credit report are two entirely different things, your score comes from the information in your report.

The actual number is determined by the following information and their associated weight in relation to your score (credit score formula courtesy of Wells Fargo):

What your credit score is based on:

• 35% payment history. How reliable you are. Late payments hurt you.
• 30% amounts owed. How much you owe and how much credit you have available, or your “credit utilization rate.”
• 15% length of history. How long you’ve had credit. Older accounts are better because they show you’re reliable.
• 10% how many types of credit. If you have more lines of credit open, the better your score will be.  
• 10% account inquiries. How many times you have or a lender has checked your credit background.

What your credit report includes:

• Basic identification information.
• A list of your credit accounts.
• Your credit history (whom you’ve paid, how consistently you paid, and any late payments).
• Amount of loans.
• Credit inquiries or who else has requested your credit information (e.g., other lenders).

Think of yourself as a football team. The credit report is all the plays you run and the credit score is the cumulation of all the goal point units you score in the game match…

I’m such a HUGE fan of football. Can’t you tell?

“My credit score is XXX. What’s that mean?”

Your credit score will be within a range of 300 and 850. The range determines whether or not your score is solid — but a good rule of thumb is the higher your credit score, the better you’re off.

Below are a few ranges from Experian and what they may mean for you.

• 850 – 800: This is a fantastic spot to be with your credit score. If you’re here, you’ll have no problem securing a loan or a good down payment percentage on your home.
• 799 – 740: Though not the top spot, this is still a very good area to be. You’ll be offered great rates here.
• 739 – 670: This is an okay credit score range — though not great. Focus on closing unused accounts and consolidating loans to move this number up.
• 669 – 580: This is when you should start worrying. If your credit score is here, you’re considered a “subprime” borrower and won’t get very good rates. Reduce your debt load and work on your payment history in this band.
• 579 – 300: Here you’re likely not to be considered for a loan at all and will run into numerous issues with things like getting approved for apartments. You should find a non-profit credit counselor and ask for help.

It’s ridiculously easy to check your credit score. It’s so easy, I want you to do it right now.

Seriously. Checking your credit score is incredibly simple. I suggest starting at Credit Karma or Mint.

Once you have the number in front of you, it’s time to take some steps to improve your credit score.

How to improve your credit score

You don’t need to become a credit weirdo like me and read 50 books on credit optimization to raise your credit score. You can actually ignore most advice and simply do a few, key things to dramatically improve your score.

In fact, there are four major tips that will have the biggest impact in improving your credit score.

• Improve your credit score tip #1: Get out of debt fast
• Improve your credit score tip #2: Automate your credit card payments
• Improve your credit score tip #3: Keep your accounts open — and put a recurring charge on them
• Improve your credit score tip #4: Get more credit — but only if you have no debt

A while back, I asked my readers how they improved their credit scores. Their answers revealed that improving your credit score isn’t rocket science. It’s about being disciplined and having some no-nonsense financial systems in place.

I’ve included some of the best answers in here to show you that it is possible to improve your credit score and to give you insight into how you can do it yourself.

Improve your credit score tip #1: Get out of debt fast

Too many people think that since they have debt, they should game the system and play the 0% balance transfer game, switching balances from card to card to save a few percentage points on debt interest.

Yeah!! Let’s stick it to the man!

What I’ve found is that they spend more time transferring balances from card to card instead of actually paying their debt off. That’s ridiculous, especially when you consider that 30% of your credit score is calculated based on how much you owe.

Instead, I want you to pay down that debt using my five-step method. I’ve written about this system before in my post about how to get out of debt, but I’ll give you a breakdown on the exact same system that’s helped thousands of readers finally escape their debt.

Here’s a brief overview:

• Step 1: Find the exact amount you owe.
  
  

  You’re probably thinking, “Well, duh. Of course you should know how much debt you have,” but it’s actually wayyy harder than you think.

  In fact, a study found that many don’t actually know how much debt they owe. It makes complete sense too. Humans are sensitive creatures who would rather run from their problems than tackle them head-on.

  However, this just leads to you blindly paying the minimum payment instead of actually owning your debt. Only then can you start a good strategy to get rid of it.

• Step 2: Decide what to pay off first.
  
  

  Not all debt is created equal. You might have debt across several cards, each with their own balance and interest rate.

  There are typically two schools of thought when it comes to credit card debt: Pay off the highest interest rate first, or pay off the lowest balance first.

  In the standard method, you pay off the card with the highest APR since it’s costing you the most. The minimum leaves you saddled with more debt. Even $20/month more helps save you a lot of money.

  In the alternative method, you’re paying off the lowest balance first while paying the minimum on your other credit cards. This is also known as the Snowball method and was popularized by Dave Ramsey. While it isn’t technically the most efficient method, it’s enormously rewarding on a psychological level to see a credit card paid off.

  Bottom line: Don’t spend more than five minutes deciding. Just pick a method and do it.

• Step 3: Don’t be tempted.
  
  

  If you want to get rid of your debt for good, you can’t keep adding to it. That’s why you need to stop yourself from taking on more, at least until you’ve gotten rid of your existing debt.

  So do yourself a favor and get rid of your credit cards (at least until you’re out of debt). Give them to a friend or a family member to hold on to. If you have a safety deposit box, put them in there for a while. Some people have literally frozen their cards in a block of ice so they have to wait a few hours before using them. Anything works as long as your cards are out of sight and out of mind.  

• Step 4: Negotiate a lower interest rate.
  
  

  Did you know that you can actually save over $1,000 in a single phone call with your credit card company? Using simple negotiation systems, you can lower your credit card’s APR and put that money back in your pocket. For the exact scripts that you can use during your negotiations, be sure to check out my full article on eliminating debt.

• Step 5: Decide how you’re going to pay your debt.
  
  

  There are a number of ways you can approach this. You can use the money you got from step four and put it towards chipping away at what you owe. You can also tap into hidden income to free up some money. If you’re really enterprising, though, you can start EARNING more money — I’ll explain that in a little bit.

A while back, I created a video all about negotiating your debt. Don’t be thrown off by how I filmed it using a potato. The advice can still help you expertly negotiate with credit card companies.

And if you are in debt, one system that can help you tackle it is through automating your finances.

Improve your credit score tip #2: Automate your credit card payments

35% of your score (the biggest portion) reflects your payment history, so even missing one payment can cause your credit score to drop 100 points, jack your APR up 30%, add $200+/month to your monthly mortgage payment (insane, I know), and more.

By setting up automatic payment using my IWT system, you won’t have to worry about manually paying your bills each month or accidentally forgetting a payment and getting slapped with a huge penalty.

The best part? Once you automate your personal finances, you’ll automatically invest, save money, and pay off all your bills at the beginning of the month — not just your credit card statement!

For more information on how to automate your finances, check out my 12-minute video where I go through the exact process with you. (Try not to be too impressed with my awesome whiteboard art.)

You should ideally be paying off your entire credit card balance each month, but if you can’t, you can still improve your score by paying at least the minimums, on time, every month.

Improve your credit score tip #3: Keep your accounts open — and put a recurring charge on them

So many times, when people get motivated to “do something” about their credit cards, the first thing they do is close all the cards they haven’t used in a long time.

Sounds logical: Let’s clean out the old cobwebs in our wallet!

In reality, this is a bad idea: 15% of your credit score reflects the length of your credit history, so if you wipe out old cards, you’re erasing that history.

Plus, you’re also lowering your “credit utilization rate,” which basically means (how much you owe) / (total credit available).

For nerdy people (aka half my readers), here’s the math of your credit utilization score — plus a little-known caveat:

“If you close an account but pay off enough debt to keep your credit utilization score the same,” says Craig Watts of FICO, “your score won’t be affected.” (Most people don’t know this.)

For example, if you carry $1,000 debt across two credit cards with $2,500 credit limits each, your credit utilization rate is 20% ($1,000 debt / $5,000 total credit available).

If you close one of the cards, suddenly your credit utilization rate jumps to 40% ($1,000 / $2,500). But if you paid off $500 in debt, your utilization rate would be 20% ($500 / $2,500) and your score would not change.

A lower credit utilization rate is preferred because lenders don’t want you regularly spending all the money you have available through credit — it’s too likely that you’ll default and not pay them anything.

NOTE: If you’re applying for a major loan — for a car, home, or education — don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply. However, if you know that an open account will entice you to spend, and you want to close your credit card to prevent that, you should do it. You may take a slight hit on your credit score, but over time, it will recover— and that’s better than overspending.

Bottom line? Even if you don’t use a card, keep it open. Put a small charge on it — say, $5/month — and automate it each month. This way, you ensure your card is active and maintains your credit history.

Improve your credit score tip #4: Get more credit — but only if you have no debt

I cannot stress this enough: This system is only for financially responsible people. That means you have zero debt and you pay your bills in full each month. It’s not for anyone else.

That’s because this system involves getting more credit to improve your credit utilization rate. This falls in the same 30% bucket as your debt does when it comes to your credit score.

To improve your credit utilization rate you have two options: Stop carrying so much debt on your credit cards (we covered that above) or increase your total available credit. Since you should already be debt-free, all that remains for you to do is to increase your available credit.

Here’s a great script you can use when you call your credit card company:

YOU: Hi, I’d like to increase my credit. I currently have $5,000 available and I’d like $10,000.

CC REP: Why are you requesting a credit increase?

YOU: I’ve been paying my bill in full for the last 18 months and I have some upcoming purchases. I’d like a credit limit of $10,000. Can you approve my request?

CC REP: Sure. I’ve put in a request for this increase. It should be activated in about seven days.

I request a credit-limit increase every six to 12 months because it’s such an easy win. I suggest you do the same.

Remember: 30% of your credit score is represented by your credit utilization rate. To improve it, the first thing you need to do is get debt-free. Once that’s done, THEN increase your credit.  

Improve your credit score = Big Win

Take the time to start improving your credit score using the four systems outlined above — and to help you even more, I’d like to offer you something: The first chapter of my New York Times bestseller I Will Teach You to be Rich.

It’ll help you tap into even more perks, max out your rewards, and beat the credit card companies at their own game.

I want you to have the tools and word-for-word scripts to fight back against the huge credit card companies. To download it free now, enter your name and email below.

How to improve your credit score in 4 systems is a post from: I Will Teach You To Be Rich.

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5 Ways To Make The Most of Your TFSA

The Tax-Free Savings Account (TFSA) is the best long-term wealth-building vehicle available to Canadians, but most people don’t see it that way. The Tax-Free Savings Account is one of the only places you can earn completely tax-free income on your investments. Any interest, dividends, or capital gains within your TFSA will never be taxed — not now, not in future years, not if you contribute a certain amount, not if you make a withdrawal, n e v e r. This is unlike other investment vehicles like the Registered Retirement Savings Plan (RRSP), where you don’t pay taxes on the years you contribute but will pay taxes when you make a withdrawal. Furthermore, you never lose your TFSA contribution room. If you take money out, you can put it back in the following year, making this also one of the most flexible investment tools available. For a more in-depth comparison of […]

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All Weather Portfolio: 5 questions (and answers) about the mix

The All Weather Portfolio is a diversified asset mix first introduced by hedge fund manager Ray Dalio and popularized in Tony Robbins’s book MONEY Master the Game: 7 Simple Steps to Financial Freedom.

Here’s what the portfolio looks like:

I can already hear you now: “Yeah, yeah. Another portfolio mix that’s supposed to solve all my money problems. What makes this one different?”

Well as you might be able to guess, this portfolio is designed to weather through any financial climate — be it a bull market, bear market, recession, or whatever! And based on its historical performance thus far, it holds up to the name.

Let’s take a look at the All Weather Portfolio, its origins, and how you can build one yourself.

Who created the All Weather Portfolio?

The All Weather Portfolio is the brainchild of hedge fund manager Ray Dalio.

Dalio is the founder of Bridgewater Associates, the “world’s biggest hedge fund firm,” according to Forbes. The firm is also famous for its flagship “Pure Alpha” fund — a fund that holds nearly $40 billion.

Oh, and Dalio also predicted the 2008 financial crisis.

From The New Yorker:

In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world’s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s flagship Pure Alpha fund rose in value by 9.5% after accounting for fees. Last year, the Pure Alpha fund rose 45%, the highest return of any big hedge fund.

Before all that, though, he had a relatively modest upbringing. The son of a working-class Italian-American family, Dalio worked as a golf caddy when he was young, earning tips from his wealthier clientele. After a brief stint on the floor of the New York Stock Exchange, he started Bridgewater Associates in 1975 out of his Manhattan apartment.

More than three decades later, it’s grown to a massively successful hedge fund firm that manages over $160 billion in assets.

It wasn’t until he was interviewed by motivational speaker and life coach Tony Robbins, though, that he revealed his All Weather Portfolio to the world.

In an interview published in Tony Robbins’s book MONEY Master the Game: 7 Simple Steps to Financial Freedom, Dalio presented an asset allocation mix that Robbins says “stands the test of time.”

Let’s take a look at the exact asset allocation in that portfolio now and see the reasons behind why it works.

What’s in the All Weather Portfolio?

The asset allocation of the portfolio is broken up like this:

• 40% long-term bonds
• 30% stocks
• 15% intermediate-term bonds
• 7.5% gold
• 7.5% commodities

The reason he chose those assets goes into his theory on economic “seasons.” According to Dalio, there are four things that affect the value of assets:

1. Inflation. The increase in prices for goods and services — and the drop in purchasing value of a currency.
2. Deflation. The decrease in prices for goods and services.
3. Rising economic growth. When the economy flourishes and grows.
4. Declining economic growth. When the economy diminishes and shrinks.

Based on these elements, Dalio says that we can then expect four different seasons that the economy can go through. They are:

1. Higher than expected inflation (rising prices).
2. Lower than expected inflation (or deflation).
3. Higher than expected economic growth.
4. Lower than expected economic growth.

So he constructed a portfolio with assets that have performed well when each of those seasons occurred. The result is a diversified portfolio that can consistently earn you money while keeping you financially secure during bear markets.

A few interesting takeaways from the portfolio:

• The portfolio has a relatively low amount of stocks. This is due to the high volatility of stocks — and if you’re trying to make a portfolio that is as risk-free as possible, you’re going to want to minimize that.
• Bonds make up the majority of this portfolio. According to Dalio in MONEY, “this counters the volatility of the stocks.” And if you’re building a portfolio that prioritizes minimal risk over making as much money as possible, this is the way to do it.
• There is 15% in gold and commodities. With the high volatility of those assets, they do well historically in environments where there is inflation.

This all combines to make a well-balanced portfolio that can “weather” any season … but how well has it really done in the past?

How has the All Weather Portfolio done in the past?

Back-testing the All Weather Portfolio reveals that it does generally live up to its name. “The strategy [Dalio shares] has produced just under 10% annually and made money more than 85% of the time in the last 30 years (between 1984 and 2013)!” Robbins writes.

And it isn’t just Robbins who’s saying this. Others have back-tested the All Weather Portfolio and some have even found that it outperformed the popular 60/40 asset allocation mix from 1984 through 2013.

Robbins also notes that if you invested in the All Weather Portfolio from 1984 through 2013, you would have made money just over 86% of the time. The average loss was just under 2% with one of the losses at just .03%.

A few more fast comparisons:

• When back-tested during the Great Depression, the All Weather Portfolio was shown to have lost just 20.55% while the S&P lost 64.4%. That’s almost 60% better than the S&P.
• The average loss from 1928 to 2013 for the S&P was 13.66%. The All Weather Portfolio? 3.65%.
• In years when the S&P suffered some of its worst drops (1973 and 2002), the All Weather Portfolio actually made money.

How do I build an All Weather Portfolio?

If you want to build your own All Weather Portfolio but don’t know where to start, don’t worry. Here’s a suggestion for comparable securities that you can invest in yourself (courtesy of Nasdaq.com):

• 40% iShares 20+ Year Treasury ETF (VTI)
• 30% Vanguard Total Stock Market ETF (TLT)
• 15% iShares 7 – 10 Year Treasury ETF (IEF)
• 7.5% SPDR Gold Shares ETF (GLD)
• 7.5% PowerShares DB Commodity Index Tracking Fund (DBC)

The breakdown of your portfolio will look like this when it’s all said and done:

If you’ve never invested before and don’t know how to actually buy the above shares, you’re in luck: There is a wealth of great, reliable brokers to help get you started building your portfolio.

Our best advice for choosing a broker? Pick one of the big ones.

Our suggestions:

• Vanguard (This is the one Ramit uses)
  • Phone #: 877-662-7447
• T. Rowe Price
  • Phone #: 800-225-5132
• TIAA
  • Phone #: 800-842-2252
• Charles Schwab
  • Phone #: 800-435-4000

BONUS: If you want Ramit’s insights to a few great companies that provide great brokerage services, be sure to check out his video on how to choose a Roth IRA.

You can easily sign up for these brokers by following seven really easy steps:

• Step 1: Go to the website for the brokerage of your choice.
• Step 2: Click on the “Open an account” button. Each of the above websites has one.
• Step 3: Start an application for an “Individual brokerage account.”
• Step 4: Enter information about yourself — name, address, birth date, employer info, social security.
• Step 5: Set up an initial deposit by entering in your bank information. Some brokers require you to make a minimum deposit, so use a separate bank account in order to deposit money into the brokerage account.
• Step 6: Wait. The initial transfer will take anywhere from 3 to 7 days to complete. After that, you’ll get a notification via email or phone call telling you you’re ready to invest.
• Step 7: Log in to your brokerage account and start investing in the above assets.

NOTE: The wording and order of the steps will vary from broker to broker but the steps are essentially the same. You’re also going to want to make sure you have your social security number, employer address, and bank info like account number and routing number available when you sign up, as they’ll come in handy during the application process.

The application process can be as quick as 15 minutes. In the same time it would take to watch this weirdo tell you how much to charge your customers, you could set up a new brokerage account and start investing in your future.

If you have any questions about funds or trading, call up the numbers provided above. They’ll connect you with a fiduciary who works for the bank in order to give you the best advice and guidance they can.

Pro-tip: Automate your All Weather Portfolio

You can take your investing even further by automating the whole process so you can easily invest money each month when your paycheck arrives.

Automating your personal finances lets you know exactly how much you have to spend each month while setting aside any worries about paying the bills or investing consistently.

How does it work? Your money is sent exactly where it needs to go — to pay utilities, your sub-savings account, your rent, whatever — as soon as your paycheck shows up each month.

Check out Ramit’s video below to learn exactly how to set it up today.

How do I rebalance my All Weather Portfolio?

Dalio also suggests rebalancing this portfolio each year in order to maintain the original asset allocation.

If you want to know more about portfolio rebalancing, be sure to check out our article on how to rebalance a portfolio. To quickly recap, though, rebalancing your portfolio is the process of modifying your asset allocation as the amount of money in each investment fluctuates with the constantly changing market.

And it all boils down to one thing: Asset allocation. This is how much money you invest into certain asset classes in your portfolio, the major ones being stocks, bonds, and cash.

To rebalance your All Weather Portfolio, you just have to follow three super simple steps.

• Step 1: Find your target asset allocation.
  
  

  Remember the asset allocation for the All Weather Portfolio: 40% long-term bonds, 30% stocks, 15% intermediate-term bonds, 7.5% gold, and 7.5% commodities.

  That’s the goal asset allocation you should have when you’re finished rebalancing.

• Step 2: Compare your portfolio to your asset allocation target.
  
  

  How has your portfolio changed since you last saw it? Which investments got bigger and which need “pruning”?

  If your stocks ballooned so now it takes up 50% of your portfolio, you’re going to either prune it back or invest in your other assets to balance it out — which brings us to:

• Step 3: Buy and/or sell shares to get your target asset allocation.
  
  

  To get your original asset allocation back in the above example, you’re going to need to either invest more into the other assets OR sell your shares in stocks to go back to the All Weather Portfolio’s original mix.

Once it’s reverted back to your target asset allocation, congratulations! You’ve successfully rebalanced your portfolio!

Always have money to invest in the All Weather Portfolio

The Scottish poet Robert Burns once wrote, “The best laid schemes of mice and men often go awry.”

For all you non–former English majors out there, that means you can have your whole life route planned out, but when life throws a wrench in your spokes everything can turn off-course.

The All Weather Portfolio was designed to get through the times when the market throws you off-course while making you money during stable ones — and unless you’re a billionaire hedge fund manager with a track record of predicting recessions, you’re not going to be able to anticipate the next one.

The best thing YOU can do then is prepare for the worst. That starts with having the money to invest and spend even when the market falters.

That’s why we want to offer you the Ultimate Guide to Making Money.

In it, we’ve included our best strategies to:

• Create multiple income streams so you always have a consistent source of revenue.
• Start your own business and escape the 9-to-5 for good.
• Increase your income by thousands of dollars a year through side hustles like freelancing.

Download a FREE copy of the Ultimate Guide today by entering your name and email below — and start earning money for your All Weather Portfolio today.

All Weather Portfolio: 5 questions (and answers) about the mix is a post from: I Will Teach You To Be Rich.

from I Will Teach You To Be Rich http://ift.tt/2AQqcn6
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