This week on the Retire With More show we were thrilled to speak with Tony Robbins, the world’s leading authority on leadership psychology. He has coached and inspired more than 50 million people, including CEOs and billionaires, as well as millions of regular people at his live events.
He’s a man Oprah has called “superhuman.” Now Tony has written a great book, for weeks and weeks a No. 1 best-seller, called Money, Master the Game, 7 Simple Steps to Financial Freedom.
In the book, Tony talks with 50 of the world’s greatest investors and he learned many fascinating things, perhaps none more fascinating than how the rich and successful think about risk. They hate it. In fact, the world’s top investors think more about reducing risk than they do about making money.
“The truth of the matter is they all live by one universal principle at that level. And it’s something most average individual investors never heard of. It’s called asymmetrical risk-reward. It’s a big word, what does it mean? It simply means they do not risk a lot to make a lot. They are obsessed with finding what’s the least amount I can possibly take with the greatest potential upside.
“In other words, how do I risk a little and make a lot? And the way in which they do that is really interesting. Paul Tudor Jones does it — I’ve worked with him for 21 years making sure he does this — is every time he makes an investment his question is, ‘Is this a 5 to 1? If I risk a $1, can I really make $5?’ Now he knows he’s going to be wrong. So if he risks a dollar trying to make five and he’s wrong he can now risk another dollar and he’s only risked two to make five. He can be wrong four times out of five and still be great.” — Tony Robbins
Protecting the downside
Cutting back on risk is so important that it informs the business plans of some of the world top entrepreneurs. Sir Richard Branson, one of Tony’s friends, is very well-known for financing and participating in extreme sports. He’s interested in flying, space travel and ballooning, to name a few of his endeavors.
Yet Branson doesn’t take risks on his businesses. Rather, he employs radical risk reduction to make sure his plans will work. It’s all about not losing money, as Robbins explains.
“When it comes to business his number one question is, ‘How do I protect the downside?’ And when he does it, I’ll give you a perfect example of asymmetrical risk-reward, when he started Virgin Air, his biggest risk was you’re buying these millions, tens of millions of dollars Boeing jets. So he went to Boeing and made a deal that said if he failed, if the business didn’t work within two years, he could give back all the jets with no downside, no liabilities.” — Tony Robbins
That might sound great, but how do I use these ideas in my own life, my own retirement saving plans? Tony has that figured out, too. He tells people to think carefully about how much risk really costs them. Once you identify the risks of investing, find ways to reduce or eliminate them.
One of the biggest risks people face when saving for retirement is the unseen risk of fees. Another is concentrating on the specific investments when, instead, they should be focused on asset allocation and diversification that will reduce their risks. David Swensen, who ran the Yale University endowment and turned $1 billion into $24 billion over three decades there, explained it this way, Tony told us.
“I asked David, if you want to get greater returns, what are the things you can manipulate? You can only manipulate a few items. You can manipulate which stock selection you make. You can manipulate the timing. And he said you can manipulate asset allocation. And of those three, asset allocation is the only one that matters. Because you’re going to be wrong on timing and its costs you money to get some advice and you’re going to be wrong on a lot of those pieces.
“So, asset allocation is the most important thing. Diversification is the most important thing, like you guys are teaching. But he said the other one is, really, making sure that you also, the third principle I’d use, is tax efficiency. Because you and I both know, it’s not what you earn that matters, it’s what you keep that matters. You can’t spend what you earn. You can only spend what keep.” — Tony Robbins
Click here to listen to this episode of the Retire With More show with our guest, Tony Robbins, as well as past episodes.