Passive Income

Knowledge is power. -Sir Francis Bacon

At F3, we define financial independence as having more passive income than your living expenses. It’s not about how much money you have, its about how much money you have coming in. You can have $1 million dollars invested in “safe” Certificates of Deposit (CDs) at the bank earning 2% interest per year, which is $20,000 per year income… which, according to the HHS 2011 guidelines for a family of 4, is below the poverty level!

The 2 Levers

When you drive, you have 2 main levers, being the steering wheel and the floor pedals. When it comes to creating passive income, you have 2 main levers: 1) your mass of capital and 2) the rate of return you can generate on that mass of capital. If you increase either one of those two levers, the amount of your passive income also grows.

For example, if you have $140,000 of investment capital, and you earn a 6% monthly return, then you will be creating $8,400 in passive income per month, which is $100,000 of passive income per year.

Adding in the element of compounding… if you reinvest your monthly profits and wait 12 months to withdraw your accumulated compounded profits, then it would only require $100,000 of capital to create that same $100,000 of passive income.

The mass of capital can come from 1) savings, 2) investment debt (other people’s money or OPM), or 3) reinvesting your profits to induce compounding of your returns (remember what we said on the “Our Philosophy” page about capital reinvestment being a key to wealth creation). You’ll learn more about investment debt in our Free Report.

Red Arrow Passive Income

Generating Consistent High Returns

When pursuing the goal of creating high returns while minimizing risk, following the conventional wisdom of the 99% won’t get you there. In fact, as you’ll see below, you’ll end up having to just the opposite of what most financial planners are coached to tell you.

It is commonly thought that if an investment is high return, it must be high risk. What the common person does not know is what “risk” actually means. Risk is variance. Variance is risk… variance (upward and downward movement) from a norm (a trendline). The more you move up and down movement you have away that norm, the more risk you have. With investing, you have positive variance (positive risk), and negative variance (negative risk). Positive risk is your friend because it means more money in your pocket. The real risk you want to watch out for is negative risk, more specifically, risk of loss of original investment principal. Positive risk is your friend. Negative risk below zero is your enemy. Here’s how you surround yourself with friends and get rid of your enemies, investment speaking…

To key to maintaining a high “Rate of Return” is Risk Management.

Risk Mitigation

After controlling for Bad Risk, there are 8 different layers to conservative risk management, as follows:

  1. Strategy Risk
  2. Specific Risk
  3. Market Risk/Systematic Risk
  4. Fraud Risk/Ponzie Scheme (Madoff) Risk
  5. Financial Institution Risk
  6. Sovereign Risk/Political Risk
  7. Currency Risk
  8. Worst Case Scenario Risk Risk

Bad Risk:Your first goal is to avoid losing your original investment principal, so the first step is to generate returns as high above zero as possible (our target is 6% return per month or 72% non-compounded per year, or better). That way, you have a buffer zone before you start losing your original investment capital. More importantly, though, you can completely eliminate this “Bad Risk” by taking risk of the table. You take Bad Risk off of the table when you remove your profits from your investment accounts and repay your source of funding. Yes, you are not compounding your profits at this point, but taking negative risk off the table is the first order of business. As a rule of thumb, always start with the minimum investment! Add more capital into a particular managed account only after completely taking negative risk off the table. Once a trading account has reached break-even, you can then let your profits compound, and you can even add more capital. If you add more capital, then treat that new batch of capital with the same amount of respect as the original batch of capital, and take risk off of the table each and every month until that reaches break-even, too and is free from this Bad Risk. If your source of funding was your own savings, then you can always re-deploy that capital into another high performing trading account and get the benefit of compounding that capital, even though it is not being compounded by the original trader. In this way you are actually taking on less risk, because you are using diversification to control for “Specific Risk”, which we’ll mention later, but first, let’s talk about the actual investment strategy that you use to generate your high returns…

  1. Strategy Risk: 99% of people utilize the “Buy and Hold” method of investing, which is EXTREMELY RISKY. For proof, reflect on the millions of bankruptcies of the investors, real estate, and stock investors, banks, and businesses that only use the “Buy and Hold” approach. Buy and Hold only works in an upward market. But there are 3 market conditions… Upward (Bull) Market, Downward (Bear) Market, and Sideways (Channeling) Market. If you only do Buy and Hold, you’re guaranteed failure two thirds of the time. Robert Kiyosaki, explains this very well in this CashFlow 202 boardgame overview:


    What he calls “Technical Trading” is actually “Active, Non-Directional or Multi-Directional trading.” Active is the opposite of just holding on for the long term, and multi-directional is the opposite “buying” or “longing” the market. With an active multi-directional trading strategy, you don’t care if the market goes up in value or goes down in value, because you can make profitable trades any direction. Note that in the CF 202 game, you become the “amateur” trader. Our model might be considered CashFlow 303, without having to play his boardgames dozens of times, because we take it to the next level by having best of class professional traders do the active multi-directional trading for us.
  2. Specific Risk: You are at your riskiest position when you only have one trading strategy working for you. Never have only 1 professional trader working for you! If you have only one trader working for you, be it yourself or a professional, then you are at MAXIMUM “Specific Risk”, which is the risk specific to one particular person or management team’s skill level. Right from the beginning you should have your mass of capital divided amongst several different traders with several different strategies that are not correlated with each other.

    The way to manage Specific Risk is to have as many different qualified professional traders as possible, each with non-correlated trading strategies. If having just one single trader is 100% Specific Risk, then you can reduce that risk by 90% if you simply have 10 qualified traders that meet your trading parameters. We have found some traders who have account minimums as low as $1,000. This means it is possible to have at least 4 different traders working for you while having as low as $5,000 at risk. Remember, the goal is to have as many high performing professional traders a possible, be it 10, 15, or more strategies working for you in your portfolio, depending on how much capital you have (incidentally, when someone tries to learn how to trade on their own, they typically only are learning one single trading strategy, so becoming an arm-chair trader is not very wise, from a risk management perspective, and it is not the highest and best use of your time, talents, and resources if you can find other traders who can generate higher returns more consistently than you can).

    So to manage Specific Risk, have as many traders as possible (on our Rolodex we list over 15 of them), and when setting up a new account with a trader, always start with the MINIMUM, and take risk off the table each and every month. This way, you spread your capital among as many traders as possible as fast as possible. The more traders you have, the less risk you have. Even though you are putting more capital at risk, you are actually taking on LESS risk in doing so. Kind of counter-intuitive, isn’t it?

    Let’s make sense of all of this… even though our trading parameters are that the traders have to average over 6% monthly return, they will almost never return exactly 6% in any given month… their performance will be above or below that. But, if you have 10 traders or more, then across your entire portfolio, one trader’s gains will counter-balance another trader’s losses, and their monthly performance will actually average each other out in any given month, such that in your portfolio as a whole, you’ll see a pretty consistent return right around the 6% range or better for any given month. In other words, in your portfolio as a whole, the variance in your portfolio will actually be pretty low, or in other words, you will have created a low-risk (low-variance), high-return investment portfolio. All the while, you are taking negative risk off the table, and once you have done this, that managed account is now a high performing asset that is growing practically risk free. A risk-free high-return investment portfolio is the goal. That is your evergreen moneytree, your source of perpetual passive income for generations to come. Make sense?

  3. Market Risk/Systematic Risk: Even though conventional wisdom is to invest in stocks, bonds, and real estate, there are actually much better options. We have found that the best performing professional traders who can generate average monthly returns of 6% or better are active non-directional traders in Forex, commodity futures, stock options, and ETFs (exchange traded funds). These are non-correlated asset classes. This means that if there is a dramatic event that shocks the stock market, the commodities market and Forex markets will be relatively unaffected by it. This is how you control for market risk…by having active non-directional traders in different markets. As you build out your portfolio of professional traders, you will have traders and strategies spread out amongst these different asset classes, these different markets. The Forex strategies tend to operate in shorter time frames, so you can see results most quickly, with the least amount of capital at risk. You will probably want to start with those traders and migrate toward the other asset classes once you can comfortably put a minimum of $30k or $50k into a single account and be comfortable having it traded for a couple of months before seeing the full results, because those asset classes tend to have trading strategies where the trades are open for much longer periods of time.
  4. Fraud Risk/Ponzie Scheme (Madoff) Risk: The easiest way to control for risk of fraud or a Ponzie scheme is to utilize “Managed Accounts” as your investment vehicle. Mutual Funds, Hedge Funds, Limited Partnership, and other conventional structures have the custodian of the funds and the trading of the funds occurring under the same umbrella. Sure, they may claim to have a 3rd party auditor, but so did Bernie Madoff!! With a Managed Account, you separate the custodian of the funds from the trading of the funds, because the trader is not associated with the brokerage firm where your funds are located. The brokerage firm has zero incentive to fake the trading results, and the trader has no ability to put money into or take money out of your account… only you do. It’s a match made in heaven. So the investment vehicle of choice is a Managed Account or something structured like a Managed Account.
  5. Financial Institution Risk: A brokerage firm is a financial institution, and they have account with prime banks where the funds are actually deposited. Financial institutions (banks included) can go bankrupt. MF Global is a prime example. To control for financial institution risk, have your funds with as many different qualified traders as possible, in as many different Managed Accounts as possible, with as many different brokerage firms as possible, which brokerage firms use different prime banks. That way, if there is another shock to the banking system, you’re protecting your downside.

  6. Sovereign Risk/Political Risk: Countries can make stupid laws that negatively affect investors. Mexico instituted capital controls in the 1980s, whereby you could not bring US dollars into our out of the country. In 2011 Argentina and Brazil put in place their own capital controls that affected foreign and domestic investors. On October 18, 2010, U.S. regulators changed the amount of leverage that U.S. residents can utilize in their forex trading accounts. The new regulations require a reduction in leverage by 75%, a first-in-first-out trading rule, as well as a no hedging rule. Greece is near default on its Sovereign Debt, while Portugal and Cyprus have had their sovereign debt downgraded to junk bond status. France and Austria have lost their AAA credit rating, as has the United States. Sovereign Risk/Political Risk is very real, but few financial planners every think of it. To simplest way to control for this risk is to have your Managed Accounts hosted by brokerage firms in as many different countries as possible. Switzerland, Germany, New Zealand, and Canada seem to be the easiest options (you might eventually have to open up offshore entities to own some of these accounts, but we show you exactly how to go about doing that in the Advanced Asset Protection Strategies page on our Members Only website).
  7. Currency Risk: If all of your investments are denominated in US dollars, then then the dollar loses value, so does your entire investment portfolio. Why give the Fed Chairman the key to your financial fortress? DON’T! The way to control for Currency Risk is by having your Managed Accounts be denominated in currencies other than US dollars, which is easy to do when they are located in other countries. Your accounts in Germany could easily be denominated in Euros, in Switzerland you’d have the Swiss Franc, and in New Zealand you could have the New Zealand Dollar or the Aussie Dollar, and in Canada you could use the Canadian Dollar. So, in summary, if you really want to be hard-core about managing risk, you’ll create a diversified investment portfolio of high performing active non-directional traders using Managed Accounts in as many different brokerage firms as possible in as many different countries as possible with as many different base currencies as possible. If is seems difficult to figure out how to do this correctly, your right it is, which is why we already did it for you… your job is to just walk down the red carpet once you’ve joined our Mastermind Group and have access to our Members Only website.
  8. Worst Case Scenario Risk:If there is a sudden economic collapse or a Global Currency Reset, or World War III or the implementation of Martial Law, all of which are possible and seem to become increasingly likely over time, then you need to have controlled for that risk. For that, we have put together a methodical, very detailed “Downside Scenario Protection Plan” which you will gain access to in the Members Only Area of our website. This includes self-reliance in food, water, shelter, health, energy and personal safety. Some of the options are inexpensive Do-It-Yourself, and other options are more expensive from 3rd party vendors. Once you have structured your affairs for your household, it is important to encourage some local neighbors to do the same, because there is safety in numbers. Plus, if we enter into a barter economy, you can produce a critical mass of products for barter.

Scaling Up Your Mass Of Capital

You might remember that we said that as you take your monthly profits off the table, repay your original source of investment capital, this is the case if it be your savings or investment debt. When scaling up your Mass of Capital, some people think that compounding is the most powerful mechanism. That is not necessarily the case, because if you use investment debt, then you can scale up OPM even faster. Here’s how…

When using investment debt, some people think that you should only make the minimum payment to the lenders, so that you can stretch out the use of their capital as long as possible and let your excess profits compound. Wrong answer! You forgot the first order of business which is to completely take risk off the table.

As you develop a new relationship with a lender, they will only lend you the minimum amount they’re comfortable with. If you generate a 6% per month return on the capital, and use all of those profits to make much larger monthly payments than just the minimum principal plus interest, then they are going to LOVE you as a borrower, especially when the loan is in the form of a line of credit. Lines of credit are meant to be drawn down on and then repaid within a short period of time. That is how they account for it at the bank level. If you treat the line of credit like a term loan, by only making the minimum monthly payments, then they will not like you as a borrower. If, instead, you make larger monthly payments, then within 6 months or so, they will probably double the amount they will lend to you. This means that your mass of capital just doubled in size within a much shorter period of time than it could through compounding alone! Plus, you’ve been taking risk off the table the entire time, which strengthens your personal position even further.

One of the business funding processors we use who does Personally Guaranteed (PG) Business Funding can get you $100,000 of investment debt within 30 days, and they don’t charge you any up-front fees to do so. They get the funding through several lenders, not just one, so you’ll have 5 or 6 lines of credit ranging from $5k to $40 each. You spread that $100k among 10 traders or so and you take your profits off the table every month and repay your source of funding. Banks make money by making loans, and they want to lend to good borrowers. So, implementing the principles just explained, after 6 months of making more than the minimum monthly payments, the lenders want to double the amount of money they lend you, so your Mass of Capital goes from $100k to $200k in just 6 months. You put the incremental capital with more traders, reducing your specific risk, market risk, financial institution risk, sovereign risk, and base currency risk even further as you do so. After making another 6 months of taking risk off the table and making more than the minimum monthly payments, the lenders double your lines of credit again, taking your Mass of Capital from $200k to $400k, all within 12 months!!

That is how you scale your Mass of Capital vertically. Is there a way to scale it horizontally? Yes, there is… Now, here’s the million dollar question, “How many corporations can an individual own?” Answer: However many you want!! For this, you have to tap the well of Non-Personally Guaranteed (NoPG) Business Funding. Let’s say you have 3 corporations with $100k in funding each, for a total of $300k as your starting point. After 6 months taking risk off the table and making more than the minimum monthly payments, they want to double your lines of credit, so your $300k become $600k in funding. Rinse and repeat for 6 more months and your $600k is double again, making is $1.2 Million (we cover this in detail during the Phone Interview after your submit your Membership Application Form). This is all part of what we internally refer to as “Level 1”, or the “hundred-thousandaire” stage. Everybody starts at Level 1.

Once your Mass of Capital has reached the 7 figures and you have demonstrated that you can be a wise steward over the money under your control, then door opens to “Level 2”. At Level 2, you gain access to a private, invitation only method of investing where the historical returns are north of 20% per month. A little math quickly reveals that this translates into passive income north of $200,000 per month. That is why it is important to lift your vision and lay the groundwork while you are a “hundred-thousandaire,” so that you can have already built out the infrastructure needed to absorb that level of capital and put it to its highest and best use in your humanitarian projects, your efforts to help others.

If you read the New Testament, in Matthew 25: 14-30 you’ll read the parable of the Talents. A “talent” is a measurement of weight. One “talent” of silver, in today’s economy, is equal to about $50,000 US dollars. 3 talents = $150,000 and 5 talents = $250,000. In the parable, the Master gives (loans) the money to 3 people and the wise stewards doubled the value of the money (remember the Rule of 72) by “putting the money to work” whereas the foolish servant was afraid of losing it (risk management) so he put it in a “guaranteed investment” (buried it in a hole in the ground, like a Certificate of Deposit). When the Master returns, he takes the money away from the foolish servant and tells the wise stewards that whereby they proved themselves faithful over a “few” things, they would be made stewards over “many” things. If $250,000 is “a few”, then I wonder how much “many” would refer to… 7 figures or more perhaps? (Note: in some versions of the Bible, the talent is assumed to be a talent’s worth of gold, which is worth 20 years of a day laborer’s wages) This is the model for our Level 1 and our Level 2.

Implementation

Now that you know the strategy in the investment model, you can learn the tactical implementation when you join our Mastermind Group. 1st: Download and read our Free Reports, 2nd: Read our “Details” page (the link to access this page is in the Free Report), 3rd: Complete your Membership Application Form (the link to access this form is on the “Details” page), and 4th: Complete the Phone Interview. Once you are an official member of our Mastermind Group, you will:

  1. Discover the secret to creating $100K passive income, within 12 months.
  1. Master the exponential effect of COMPOUNDING RETURNS working in your favor, potentially growing your $100K passive income to over $1M of passive income per year, within 5 – 10 years.
  1. Uncover over 15 day-traders/swing-traders who can generate you average returns of 6% per month or more.
  1. Find traders with starting account minimums as low as $1,000 to get started.
  1. Reap the full profit potential of Forex, Commodities, ETFs and Stock Options, without having to personally do any trading yourself!
  1. Uncover hidden, low cost, low risk sources of investment capital, if you don’t already have a nest egg to work with.
  1. Learn how to scale up your the mass of capital working for you and gain access to the professionals who do the heavy lifting for you.

The philosophy of the rich versus the poor is this: The rich invest their money and spend what’s left; the poor spend their money and invest what’s left. -Jim Rohn