From: alexhormozi
The economic shifts experienced in 2022 have necessitated a change in investment strategies, particularly concerning how cash is managed [00:00:04]. A significant personal shift involved removing all cash from traditional banks and placing it into an alternative that offers both increased safety and higher returns [00:00:08]. This adjustment reflects a broader need to reevaluate how money is held in response to the changing economy [00:00:12].
Understanding Traditional Banking Mechanics
Many believe their cash is simply “sitting” in a bank account, but the reality is more complex [00:00:57]. When you deposit cash into a bank, you are effectively extending a loan to the bank [00:01:11]. This makes you a creditor of the bank, meaning if the bank fails, they owe you money [00:01:17].
Banks primarily engage in two activities with deposited money:
- Purchasing Government Bonds Banks often lend money to the government by buying bonds, which is considered a very low-risk investment because the government has the ability to print money to repay its debts [00:01:24].
- Issuing Loans They also loan money out for mortgages and other purposes [00:01:37].
In return for your “loan,” banks typically pay a minimal annual interest rate, ranging from 0.1% to 1% [00:01:41]. However, when banks lend this money to the government, they might earn around 4% annually, effectively making 40 times more than what they pay to their depositors [00:01:51].
Risks of Bank Deposits
Two crucial factors in lending money are the interest rate and the likelihood of repayment [00:02:03]. While interest rates are typically low for depositors, the risk aspect is often overlooked [00:02:07]. If a bank goes bankrupt, you risk losing all your money beyond the FDIC-insured amount [00:02:18]. Concerns have been raised about the solvency of the FDIC itself, and any amount exceeding the insurance limit would leave the depositor stuck as a creditor of a bankrupt entity [00:02:22].
An Alternative: US Treasuries
An alternative to traditional bank accounts that offers lower risk and potentially higher returns is investing in U.S. Treasuries [00:02:31]. Initially dismissed due to perceived boredom, Treasuries are seen not just as an investment vehicle but as a superior form of bank account [00:02:36].
Comparing U.S. Treasuries to commercial banks:
- Safety The U.S. government is considered less likely to fail than a large bank like Bank of America [00:02:54].
- Returns The U.S. government pays more interest than traditional banks [00:03:02].
- Leverage It’s possible to take loans against Treasuries for up to 80% of their value [00:03:07]. This means if you have 4,000 annually, you could take an 100,000 [00:03:11]. This strategy exemplifies smart money management techniques and financial risk management.
Banks do not promote this alternative because their business model relies on taking depositors’ money at a low interest rate and investing it to earn a much higher return [00:03:19].
Broader Investment Strategy Shift
The speaker’s personal finance strategies have evolved over time:
- Investing in oneself: Initial investments focused on learning skills, gaining access to mentors, coaching, and workshops, yielding the highest returns [00:03:30].
- S&P 500: Once personal reinvestment capacity was exceeded, funds were channeled into the S&P 500, following advice from figures like Warren Buffett [00:03:43].
- Barbell Strategy: After selling multiple companies, a barbell strategy was adopted, heavily weighting investments in stocks and real estate with minimal in-between [00:04:00].
A pivotal realization came from observing Dave Ramsey’s advice to Graham Stephan: investment distribution should reflect one’s knowledge base [00:04:46]. If 80-85% of one’s financial knowledge is in real estate, then an 80-85% allocation to real estate is a “perfect distribution” [00:04:50]. Billionaires, according to Ramsey, tend to focus on a few areas they understand deeply and invest heavily in those areas [00:05:21].
This led to the understanding that investments should align with one’s expertise [00:06:02]. For the speaker, this expertise lies in service-based businesses [00:06:09]. The core principle is that an investment is only risky if you don’t understand it [00:06:31]. Outsized returns are achieved by leveraging an “unfair advantage” – knowing more than others in a specific field [00:06:42].
The revised investment strategy now mirrors the speaker’s business strategy:
- Invest in yourself. [00:07:02]
- Invest excess capital into broad market indexes. [00:07:05]
- Once proficient in your primary domain, deploy capital into private deals within that domain. [00:07:07]
This approach emphasizes singular focus on what you know, doing it better, and consistently applying that knowledge over time to achieve substantial financial success [00:07:17].