“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!
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.
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.
After controlling for Bad Risk, there are 8 different layers to conservative risk management, as follows:
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…
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?
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.
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:
“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