Robbins Book Scares Me

Tony Robbins, who’s rah-rah and NLP I am okay with, has a new book that scares the daylights out of me.

He now touts himself a financial guru now and has tapped into some top financial names for his new book. While I haven’t seen is book yet, reports that seem very valid suggest that he interviewed a true financial genius, Ray Dalio of Bridewater Capital, and came away with a portfolio that has been called “All Weather.” The back testing on this portfolio from 1984 shows an average return of 7% and only four down years with a worst down year of -3.9%.

That sounds too good to be true…those who know me can finish this sentence already…so therefore it’s not true.

The issue here (and I would be willing to bet on this) is that Mr. Daliao said what would have worked over the last 30 years, not what will work over the next 30 years. The suggestion that this will work going forward scares me and I would think came from the enthusiasm of Mr. Robbins, not the pragmatism of Mr. Dalio.

The portfolio is 40% long term bonds and 15% intermediate term bonds (along with 30% stocks, 15% commodities) . Here’s where the rubber meets the road.

The time period they tested the book, from 1984, a peak in the bond market for interest rates and therefore a bottom in prices, the bond market has steadily fallen in rates and rose in price. See for yourself…

30 year treasury bonds
30 year US Treasury Bond

Interest rates fell from (in round numbers) 12% to 3% over the last 30 years, down 75%, sending up bond prices. Can that downward path of interest rates continue given the Federal Reserve already went to basically zero on short term rates? Most market prognosticators believe the fed is poised to raise them in the coming year.

What scares me here is that the average person doesn’t understand this and Mr. Robbins marketing machine is so prolific it could make Kim Kurdistan blush. (Okay, that’s not possible, but you get the idea…he’s good at it.) So lots of people could blindly believe it.

If you buy long term bonds right now, then you are buying at very close to generational high prices. If interest rates rise, the value of the bonds will fall. Blindly following this advice could easily set someone up for quite a surprise should interest rates rise.

For example, if you buy a $1000 30 year bond that pays 3% and the next year, interest rates are at 4%, then the value of you bond would only be $890.78. You would have lost $110.78 in principal while you collected only $30 in interest. But that is only if you sold. If you hold the bond for the next 29 years, collecting 3% per year the entire time, you will get your $1000 back.

This strategy worked in the past, but blindly following it  without really understanding the risks and issues involved lacks wisdom and judgement. But it will probably sell a lot of books.

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