00498 Asset Allocation and Pledge Strategy: Achieving Wealth Management on Autopilot

I. Episode Theme

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This episode focuses on long-term investment in the Nasdaq 100 index fund, emphasizing the importance of avoiding interference from market fluctuations, international situations, financial statements, and economic situations. It delves into the safety of leveraged investing and correct asset allocation methods, including the 433 and 442 asset allocation strategies. Additionally, it discusses the psychological preparation in the investment process, deep understanding of capitalism, and shares how to achieve financial and personal freedom through investment.

II. Briefing Content

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Market Fluctuations and Investment Strategies

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• Market fluctuations, international situations, market analysis, financial statements, economic situations, etc., are irrelevant to individual investment returns. Teacher James emphasizes that these factors are often overhyped by the media and financial institutions but have minimal impact on long-term investors’ returns. Investors should focus on long-term trends rather than short-term fluctuations.
• Investors should avoid being influenced by market noise and news. Misleading information in the market can easily lead investors to make wrong decisions. In the long run, these short-term fluctuations are offset by the market’s long-term growth trend.
• Investment should be based on a strategy of long-term holding of the Nasdaq 100 index fund, without frequent trading. Frequent trading not only generates high transaction costs but also increases investment risk. The long-term holding strategy can reduce risks and enjoy the benefits of compound interest.

Asset Allocation and Leverage

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• The risk of leveraged investing is lower than that of non-leveraged investing. Teacher James explains that those who use leverage have more cash reserves in times of crisis, making them more resilient than those without cash reserves. The key is whether the borrowed money is invested in the right assets, such as stocks of high-quality companies.
• Investors are advised to borrow early and incorporate the funds into their asset allocation. Early borrowing allows funds to be invested in the market, enjoying longer compound interest growth. Even keeping the borrowed money as a backup is safer than not being able to obtain a loan when needed.
• Newly listed funds have larger tracking errors; it is recommended to invest in established funds. Newly listed funds, due to their smaller size, require more hedging operations, resulting in larger tracking errors that affect investment returns. It is advisable to choose established funds like 00662, which have larger scale and smaller tracking errors.
• Asset allocation should be based on individual circumstances, such as the 433 or 442 strategies, with intelligent rebalancing. The 433 strategy refers to 40% core fund (e.g., QQQ), 30% leveraged fund (e.g., QLD), and 30% cash. The 442 strategy refers to 40% core fund, 40% leveraged fund, and 20% cash. Intelligent rebalancing involves transferring a portion of the profits from the leveraged fund to cash in rising years and transferring a portion of cash to the leveraged fund in declining years.
• Borrowing should not exceed a certain percentage of total assets and should be combined with asset allocation to achieve automatic navigation. The amount of new borrowing each year can be gradually increased. For example, in the first year, you can borrow 1%-2% of the total assets, and then increase it slightly each year. The specific proportion depends on the individual’s debt tolerance. In the long-term investment process, total assets grow at a rate of more than 10% per year, while debt grows at a rate of 2% per year. Therefore, borrowing money is very safe in the long run. Through intelligent rebalancing, the automatic navigation of the investment portfolio can be achieved without frequent adjustments.
• Investors should be extremely optimistic. Regardless of any disasters or market downturns, investors should remain optimistic because the market will eventually rise and break new highs.

Real Estate and Natural Disasters

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• Real estate is a high-risk asset, subject to risks such as windstorms, floods, earthquakes, and fires. In the United States, in addition to the above risks, there are also risks of tornadoes, hurricanes, and other natural disasters. These disasters can lead to significant depreciation or even complete loss of property value.
• In contrast, the Nasdaq 100 index fund includes 100 companies, does not require payment of taxes, maintenance fees, insurance fees, and is not affected by natural disasters. These 100 companies are among the best in the United States and even globally, with high long-term investment returns.
• It is recommended to transfer the risk of real estate to the landlord by renting instead of owning property to avoid risks. Owning property requires various maintenance costs, taxes, and risks from natural disasters. Renting can transfer these risks to the landlord, and you only need to pay rent.

Long-Term Investment and Life Goals

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• Investment should control emotions, understand history, and look at the present from the future. Investing requires rationality, avoiding emotional decisions. By understanding historical market fluctuations and economic cycles, one can better grasp investment opportunities. Looking at the present from the future can strengthen confidence in long-term investment.
• The value of the Nasdaq 100 index fund will far exceed its current value in the future, and long-term holding will bring substantial returns. With the advancement of technology and economic development, the value of the Nasdaq 100 index fund will continue to grow.
• The most important goal in life is to fulfill one’s mission, not to pursue money, fame, and power. Money is only a tool to achieve life goals, not the goal itself. One should consider how to use wealth to realize one’s life values.
• Money is a tool, and one should learn to spend money, especially for wealthy retirees; spending money is a virtue. Retirees should learn to enjoy life and use their wealth to improve their quality of life and achieve their life goals. At the same time, spending money can promote economic flow and create more opportunities for young people.
• Elderly people who have retired and are very wealthy should spend money as a moral duty. Spending money can stimulate the economy, allowing young people to earn more, and they may also consider having children and getting married.

Cycles and Investment Experience

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• Predicting cycles is difficult and requires more than 40 years of market experience to fully understand a cycle. Market cycles are usually long, and it is difficult for people with insufficient investment experience to accurately predict changes in cycles.
• Invest in the US Nasdaq 100 index fund because the US is the source of the world’s strongest currency and innovative technology. The United States has strong economic strength and innovation capabilities. In the long run, investing in the US market has a high potential for return.
• In addition to listening to the opinions of Buffett and Peter Lynch, one should also learn from the experiences of failures. By learning from the lessons of failures, one can avoid making the same mistakes and improve the probability of investment success.
• Probability, accidents, and randomness: Even if there is a 99.99% chance of success and only a 0.1% chance of failure, do not do it because when you do it, it is random.

Capitalism and Wealth

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• In capitalism, if you have money, buy index funds, and you will become rich. In a capitalist society, investment is an important way to achieve wealth growth. Due to their diversified investment characteristics, index funds can reduce risks and obtain average market returns.
• To become a millionaire, one needs to understand borrowing. Moderate borrowing can amplify investment returns and accelerate wealth accumulation. However, it should be noted that borrowing must be based on safety and controllability.
• Real estate loans require repayment of principal and interest, and retirees should avoid such loans. The income source of retirees is usually relatively fixed, and the pressure to repay principal and interest is greater, which may affect the quality of life.
• Convert mortgages to home equity lines of credit to reduce monthly expenses. Home equity lines of credit only require interest payments, not principal repayment, which can reduce monthly repayment pressure.
• The US borrows money to develop its domestic investment economy. The US can borrow a little more money and repay it in 20 or 30 years. In fact, the US does not want to repay the debt. It borrows new debt to repay old debt. The money is never repaid, and the currency will depreciate.
• Borrowing without principal repayment is acceptable. Suppose you have 30 million in retirement savings, at 2%, you can spend 600,000 a year, or 50,000 a month.

Practice of Asset Allocation

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• According to Monte Carlo simulations, the intelligent rebalancing strategy can maintain the same return as 100% investment in QQQ while reducing risk. Through historical data simulation, the intelligent rebalancing strategy has proven to be an effective asset allocation method.
• Questions about asset allocation should be resolved through learning and practice, rather than simply relying on the advice of others. Investment is a process of continuous learning and practice. Only through one’s own practice can one truly understand the principles and methods of asset allocation.

III. Q&A Session

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Cat

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• Question: Details of the 433 asset allocation strategy, especially the specific steps for rebalancing at the end of the year, and how to understand the concept of “automatic navigation.” Many students are confused about how to readjust the asset allocation back to the 433 ratio.
• Teacher James’s reply: When rebalancing at the end of the year, only the leveraged fund (Q2D) and cash portions need to be adjusted, without touching the core fund (QQQ).

  • In a rising year:

    1. Calculate the annual return of Q2D (year-end asset - beginning-year asset). If there were additional investments during the year, subtract the amount of additional investments.
    2. Transfer 1/3 of the annual return of Q2D to the cash account.

  • In a declining year:

    1. Calculate 2% of the total assets.
    2. Transfer 2% of the total assets from the cash account to the Q2D account.

  • Automatic navigation means that once the initial asset allocation and annual intelligent rebalancing are completed, there is no need to frequently monitor or adjust the asset ratio, allowing the investment portfolio to operate automatically according to the preset strategy.

Pin

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• Share: Pin shared a book called “Die with Zero,” which puts forward a novel point of view: every meaningful experience in life is an investment, similar to financial investment. These experiences can bring spiritual returns, and these returns will increase over time. The book compares this kind of experience investment to financial investment. Every positive experience is like depositing the “principal” into the memory bank. Every time you recall or share these experiences afterward, you can get “interest”—happiness and satisfaction. As we age, these memories become more and more precious, just like compound interest in financial investment, whose value continues to grow. Pin took herself as an example. She decided to quit her job to accompany her elderly parents. Although this was a difficult decision financially, she regarded this experience as a valuable investment, and its return would far exceed the loss of money.
  • Teacher James’s comment: Teacher James agreed with Pin’s sharing and further explained that the purpose of life is to convert material energy into spiritual energy. Money is just a tool. The real purpose is to obtain spiritual satisfaction and happiness. We should use money to create beautiful experiences, not just accumulate numbers. He took a chart in the “One Billion Investment Lecture” as an example to illustrate how to convert material energy into spiritual energy and emphasized that ultimately we should pursue spiritual abundance.

Sunny

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• Question 1: Three years ago, she mortgaged a house and borrowed 10 million NTD in a home equity line of credit, but this money has not been used. Now she has some concerns. After these three years, she wonders if she should be braver and use this money, but she is worried about her nervous personality.
  • Teacher James’s reply: Teacher James believes that Sunny’s personality is too nervous and not suitable for complex investment operations. And pointed out that if you have a nervous personality, you are not suitable for investment.
• Question 2: Previously, she listened to some suggestions in the market and bought a large number of 20-year long-term bonds, resulting in a relatively high proportion of bonds in the current investment portfolio, and it is currently in a state of loss. Now that the market trend has changed and she is facing losses, how should she deal with this bond investment?
  • Teacher James’s reply: Teacher James pointed out that Sunny should not invest in long-term bonds and emphasized that funds should be concentrated on assets that can make money. He suggested that Sunny watch investment course videos to learn the correct investment strategy instead of blindly following various suggestions in the market.
• Question 3: Should she sell all the bonds now and transfer all the proceeds to buy QQQ?
  • Teacher James’s reply: Considering that Sunny is retired and has a fixed monthly pension, it is recommended that she reallocate all assets (including bonds, cash, etc.), invest 80% of the assets in 00662 (Taiwan ETF tracking the Nasdaq 100 Index), and invest 20% of the assets in 00864B (Taiwan’s short-term bond ETF, equivalent to cash).
• Question 4: She still has 20-30% cash on hand. Should these cash continue to be invested in 00662 and 00864B according to the 80/20 ratio?
  • Teacher James’s reply: Teacher James আবারও emphasized that all assets need to be added up for calculation to ensure that the final investment ratio of 00662 is 80% and the investment ratio of 00864B is 20%. If the cash ratio is insufficient, she may need to sell some bonds to increase the cash ratio.
• Teacher James’s additional explanation: Teacher James emphasized the importance of investment education and suggested that Sunny spend time watching course videos to systematically learn investment knowledge instead of just seeking a simple answer. He pointed out that there is no shortcut to investment and it takes time and energy to learn and understand.

Eugene

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• Question 1: When transferring a 401k account from one institution to another (TIAA), TIAA charged a 0.3% account management fee. He asked whether this fee was reasonable and whether it was too high.
  • Teacher James’s reply: Teacher James believes that the 0.3% management fee is reasonable and not too high. When conducting account transfers, such fees are normal and are necessary expenses.
• Question 2: Does the asset allocation strategy mentioned earlier include all types of assets, such as retirement accounts (such as 401k), real estate, etc.?
  • Teacher James’s reply: Teacher James clearly pointed out that the asset allocation strategy only includes liquid assets, that is, assets that can be easily bought and sold, such as 401k, IRA, personal brokerage accounts (which can buy and sell stocks, funds, ETFs, etc.). Real estate is not a liquid asset, so it is not included in the scope of asset allocation.

Zhang Yong

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• Share: Zhang Yong shared his deep understanding of Teacher James’s concept of “wealth is a talent, and happiness is a human right.” He found that in reality, many people’s behaviors are contrary to this concept, based on his work and life experience. He realized that many people, including himself, are misled by the traditional financial system and engage in unreasonable financial behaviors such as forced savings. He believes that Teacher James’s course system and philosophy are truthful and can help people achieve financial freedom.
  • Teacher James’s comment: Teacher James agreed with Zhang Yong’s sharing and further explained the essence of the capitalist system and financial system. He pointed out that the history of the development of capitalism, especially after the Industrial Revolution, led to the emergence of the working class and gradually evolved into an invisible “slavery” system. The government, financial institutions, and capitalists have jointly built a “Truman’s World” where most people live according to a set script without realizing it. Teacher James used the movie “The Truman Show” as an example to point out that this “script” was jointly set by capitalists, the government, and financial institutions to make most people become laborers and serve the capitalist system. Most people, including senior executives in the financial industry, do not even realize that they are “actors” in this system. Only a few people can see the truth and achieve true financial freedom. Teacher James emphasized that the purpose of his course is to help everyone recognize the existence of this “scam” and find ways to achieve financial freedom.
• Question: Many people are busy working and living, but their behaviors and ideas are contrary to the concept of achieving financial freedom. Most people seem to be misled by the traditional financial system and make unreasonable financial plans. Zhang Yong wants to know the essential reasons for this widespread phenomenon and how to change this situation.
  • Teacher James’s reply: Teacher James explained that the root cause of this phenomenon is the capitalist system itself. Since the Industrial Revolution, the capitalist system has gradually turned most people into laborers and built a complete system to maintain this state. This system instills the concepts of “work hard, save, and invest” in people through multiple channels such as education, media, and financial institutions, but in fact, it is “enslaving” most people. He pointed out that this is a “war without sound and breath” and most people do not realize that they are in it. Teacher James believes that to change this situation, we must first recognize the existence of this “scam”, and then gradually achieve financial freedom by learning the correct investment concepts and methods. He emphasized that we cannot change the entire system, but we can change ourselves and let ourselves and our families live a better life.

Tina

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• Question 1: Tina has currently invested most of her assets in 00662 (Taiwan) and NDQ (Australia) ETFs, and plans to transfer her Australian retirement fund to NDQ in the future. She asked whether she should conduct asset allocation after completing all investments or start considering the allocation of other assets now.
  • Teacher James’s reply: Teacher James suggested that Tina conduct asset allocation as soon as possible, rather than considering it after all funds are invested in specific assets. He believes that asset allocation should be a quick decision-making process that can be completed within a day. For those who have not retired and have not borrowed money, they can choose the 433 or 442 asset allocation strategy; for those who are close to retirement or have retired, they should use the 80/20 asset allocation strategy.
• Question 2: If according to the 442 strategy, Tina has allocated 40% of her assets to 00662 and NDQ, then after transferring the Australian retirement fund next month, should she invest in 00670L (Taiwan’s leveraged ETF)? If the funds are kept in Australia, how should they be allocated?
  • Teacher James’s reply: Teacher James suggested that Tina treat the Australian retirement fund as a cash portion and allocate it according to tax factors. If in Australia, since the dividends of NDQ need to be taxed and the tax rate is high, it is not recommended to invest all retirement funds in NDQ. The Australian retirement fund can be used as a cash reserve, while the core fund (such as 00662) is allocated in Taiwan. If the cash reserve in Australia is not enough to meet the proportion of asset allocation, a portion of the funds can be remitted from Taiwan to Australia. He suggested that Tina consider tax factors and decide the specific asset allocation ratio according to her place of residence and post-retirement life arrangements.

Wen Zhang

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• Question: Wen Zhang’s younger sister invested in a fund in Canada that tracks the Nasdaq 100 Index. The fund has a high management fee of 2.95% but promises to return 75% of the principal if the Nasdaq 100 Index falls. Wen Zhang’s younger sister is worried that she cannot control her investment behavior and may buy and sell frequently, so she is interested in this high-management-fee but guaranteed fund. Wen Zhang wants to know Teacher James’s opinion on this fund and whether there are better investment options.
  • Teacher James’s reply: Teacher James first pointed out that if investors cannot control their investment behavior, then investing in any product may face risks. He believes that the investor’s mentality and self-control are the key factors for investment success. Regarding specific investment advice, Teacher James suggested investing in the Canadian version of QQQ, such as QQC or XQQ. These ETFs directly track the Nasdaq 100 Index, have lower management fees, and have higher long-term investment returns. However, Teacher James also emphasized that the final investment choice should be based on the investor’s risk tolerance and investment experience. If Wen Zhang’s younger sister cannot overcome the impulse to buy and sell frequently, then any investment advice may be invalid.

Jenny

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• Question: Jenny does not have much money in her Roth IRA because her income is too high to contribute directly. She currently faces a higher tax rate and is considering whether she should convert all the funds deposited in her Traditional IRA (up to $7,000 per year) to a Roth IRA, even if she needs to pay higher taxes.
  • Teacher James’s reply: Teacher James thinks this is a good idea. Since Jenny’s Traditional IRA amount is already large, she will face a higher tax rate when withdrawing in the future. By converting funds to a Roth IRA, she can enjoy future tax-free growth. He suggested that Jenny make the conversion, even if she needs to pay taxes now, but it is worthwhile in the long run.
• Question 2: In addition to the annual limit of $7,000, can more be converted?
  • Teacher James’s reply: Yes.
• Additional explanation: Teacher James further explained why a Roth IRA is needed. He suggested buying leveraged funds (such as QLD) in the Roth IRA and allocating an equivalent amount of cash in the Traditional IRA or other taxable accounts. This can reduce the growth rate of the Traditional IRA, thereby reducing future tax burdens. For example, if there is $500,000 of QLD in the Roth IRA, then $500,000 of cash can be allocated in the Traditional IRA. As the Roth IRA grows, the cash allocation in the Traditional IRA can be increased accordingly.

Julie

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• Question: Julie observed that the recent volatility of QQQ is relatively large, with daily gains and losses often exceeding 1%. She wants to know the reasons behind this phenomenon and whether this high volatility will continue in the future. She believes that the volatility of QQQ in previous years was relatively small, and there would not be such large daily gains and losses unless there were major events.
  • Teacher James’s reply: Teacher James first pointed out that Julie’s observation has a “recency bias”, that is, people tend to pay too much attention to recent events while ignoring long-term trends. He showed the long-term trend chart of QQQ (including linear and logarithmic charts) to illustrate that in the long run, the volatility of QQQ has not increased significantly. The recent large fluctuations are because the price of QQQ has risen to a higher level, so even a 1% fluctuation is larger in absolute terms than in the past. Teacher James emphasized that a logarithmic chart should be used to observe long-term trends because the logarithmic chart can more accurately reflect the magnitude of asset price fluctuations.

Houqi

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• Share: Houqi shared the investment experience of a friend. This friend started participating in the company’s 401k plan when he was young, but he didn’t pay much attention at first, just investing according to the company’s match. Many years later, he was surprised to find that his 401k account had accumulated more than one million US dollars in assets. This case illustrates the power of compound interest. Even small regular investments can generate huge returns after a long period of accumulation.
  • Teacher James’s comment: Teacher James agreed with Houqi’s sharing and further explained the power of compound interest. He took the US 401k plan as an example, assuming an annual investment of 20,000 US dollars, calculated at a 14% annualized rate of return, it can accumulate to 30 million US dollars after 40 years. Even if calculated at a lower 10% annualized rate of return in the past, it can also accumulate to 9 million US dollars. This example illustrates that long-term investment and compound interest are the key factors for achieving wealth growth.

IV. Wonderful Views

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People who borrow money are the ones with lower risks, and people who do not borrow money have extremely high risks. – Teacher James

Because people with cash reserves can use funds immediately in an emergency, while those without cash reserves may face the risk of a broken capital chain. Those who have loans have more cash reserves in the face of crises and have stronger risk resistance than those who do not have cash reserves.

A house is a consumer product. It is a kind of money-eating support, not an investment, and it is a very high-risk support. – Teacher James

This sentence emphasizes the attribute of real estate as a consumer product rather than an investment product, as well as its potential high risks, including natural disasters and maintenance costs.

To succeed in investing, you must control your emotions. The first thing is to control your emotions. If you cannot control your emotions, please do not invest. – Teacher James

Emphasizes the importance of emotional control in investing. Investing requires rationality, avoiding emotional decisions.

In capitalism, if you have money, buy index funds, and you will become rich. – Teacher James

Emphasizes that in a capitalist society, long-term investment in index funds is an effective way to achieve wealth growth. Due to their diversified investment characteristics, index funds can reduce risks and obtain average market returns.

You have to recognize that real estate is a high-risk support, so it is very strange that everyone thinks that directly investing in 100 companies is very risky, but buying a house with all their assets is also very special. – Teacher James

This view challenges people’s general perception of real estate as a safe asset. Real estate is a high-risk asset with risks such as windstorms, floods, earthquakes, and fires.

If you have been speculating, then you will go bankrupt in this market. There is no need to say that if you do too much, you will go bankrupt. – Teacher James

This sentence warns of the risks of speculative behavior and emphasizes the importance of long-term investment. Frequent trading not only generates high transaction costs but also increases investment risk.

Money is not our purpose. Money is not our purpose. The whole experience of life requires money. That is our purpose. – Teacher James

This sentence emphasizes the essence of money as a tool, and the real purpose of life is experience and spiritual satisfaction. We should use money to create a better experience, not just accumulate numbers.

All passers-by, all the dogma of the financial industry are deceiving you. – Teacher James

Criticism of the traditional financial system and dogma. Only you don’t know. Capitalists know it, politicians know it, but only the workers don’t know it. 99.99% of the workers think that they are living in reality and in a real environment. In fact, you are living in a scripted life without knowing it.

Suppose you start working today, then you can borrow $20,000 every year. Then how much more will you have? You will have an extra $30 million. – Teacher James

This view quantifies the huge impact of leveraged investing on wealth growth. Moderate borrowing can amplify investment returns and accelerate wealth accumulation.

This is the power of compound interest, and let me give you an example. In the United States, 401K is $20,000. Suppose you invest $20,000 every year when you are young. With an annualized rate of return of 14%, in 40 years, you will have $30 million. You just invest without doing anything. – Teacher James

This view reveals the great power of compound interest in long-term investment. Even a small amount of money can accumulate into amazing wealth through long-term compound interest growth.

V. Summary

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This episode revolves around long-term investment in the Nasdaq 100 index fund, emphasizing the importance of avoiding market noise and adhering to long-term investment strategies. It delves into the principles and methods of asset allocation, especially the specific operations of 433 and 442 strategies and intelligent rebalancing. At the same time, it also emphasizes the feasibility and safety of leveraged investing and how to accelerate wealth accumulation through reasonable borrowing strategies. In addition, Teacher James also conducted a profound reflection on the capitalist system and financial system, pointing out that most people are living according to a set script, and proposed a path to achieve financial freedom and personal freedom.

In the Q&A session, Teacher James answered various questions encountered by different students in the investment process in detail, including asset allocation, tax planning, investment psychology, etc. He emphasized the importance of learning and practice, encouraging students to systematically learn investment knowledge by watching course videos, reading related materials, etc., and continuously summarize and improve in practice.

In short, the content of this episode aims to help investors establish correct investment concepts, master scientific investment methods, and ultimately achieve steady growth of wealth and freedom of life through long-term investment and reasonable asset allocation.