Stop Looking for “Safe” Investments
There’s no such thing as a safe investment. There are only smart investors.
When I am asked questions such as, “Is real estate a good investment?” or “Are stocks good investments?” my answer is always the same, “Are you a good investor?”
No investment is safe if you are foolish… not even gold.
Rich dad said, “The more a person seeks safety and security, the more that person gives up control over their life.” Today I see two worlds evolving. One is the world I call “the Responsible Society.” It is the group that believes in being responsible for their lives and the outcome of their lives. There is another world that I call “the Victim Society,” which is the group that believes that someone else — a company, or the government — is responsible for their lives.
In any group, family, or company, there are usually representatives of both types of societies.
Both see the world from their own context or reality and both think they are right. I’ve found that one of the dividing factors between both societies is their core view on the ideas of risk versus control. Victims tend to want to give control over their lives to someone else to avoid taking risks. Then they get angry when they feel someone abuses the control they granted the abuser in the first place. In other words, victims are often victims of themselves.
In the coming years, there will be many financial victims — people who gave control to financial professionals and bought their advice hook, line, and sinker. Many of the future victims will have believed the mantra of “Invest for the long term, diversify, go long and hold, the market has gone up over the last 40 years, and play it safe.”
These victims bought these words of advice simply because they wanted to believe the words. If they failed to choose their advisors wisely, they may become financial victims.
Are Your Investments “Safe?”
To answer that question, let’s go through several types of investments many of you probably have.
Investment #1: Savings Accounts
Most people think that to invest in a safe investment, you must also lower your return on the investment. That is why so many people put money in a savings account. They put it in for security and are willing to take less interest in return for safety. But their money is being eaten away by inflation. And the interest on their money is taxed at a high rate. So their safe-as-money-in-the-bank idea is not such a safe idea.
When you put your money in a savings account, it just sits there—doing nothing. As the dollar decreases in value, the money you are saving will buy you less in the future.
Not to mention the fees your bank charges you for them to hold your money. You may be paying more to have your money in a savings account than you are earning by keeping it there! This is not an asset that puts money in your pocket; it’s a liability because you are losing money.
Investment #2: Mutual Funds
A mutual fund is a collection of stocks, bonds, and securities. One of the reasons I do not like mutual funds is because they remind me of feed yards, the place where cattle are held to be fattened just before slaughter. The difference is that the mutual-fund feed yards are filled with little investors who are getting plump as the value of their diversified portfolio increases. Then the cowboys ride in and take their money.
Getting into paper assets such as mutual funds is much easier, less expensive, and requires very little management, which is why so many more people invest in them.
Investment #3: 401(k) Plans
A 401(k) is a popular retirement plan also known as a Defined Contribution pension plan where you contribute a portion of your salary to be invested in mutual funds. This is an easy route for many because you just sign on the dotted line and start automatically saving for retirement.
But when you do this, you give up control of your money to others, and that increases your risk. Plus, most of these plans assume you will retire in a lower tax bracket than you are now.
An Educated Investor Is an Insured Investor
It’s no secret that I avoid the aforementioned “investments” and instead focus on different asset classes. But, regardless of what you choose to invest in, you need to understand insurance or protection from losses. Investing is far less risky when you have insurance and that’s why successful investors make it a part of their strategy.
It’s important to note that there is more than one kind of insurance when it comes to investing. There is insurance:
- for people and property
- against market cycles
- against mistakes, omissions, and lawsuits
Professional investors are always concerned about protection. When you turn your money over to a financial expert, one very important question is, “How safe is my money?” Professional investors do not simply “invest for the long term, buy, hold, diversify, and pray.”
The rich also use legal entities as forms of insurance. My poor dad was very proud that his house, his car, and his other belongings were in his name. In contrast, my rich dad held most of his valuable assets in the name of legal entities such as corporations, trusts, and limited partnerships. Because we live in a litigious society, he wanted to personally own as little as possible. To rich dad, a legal entity was a form of insurance. Today there are even more types of entities available. Different entities are appropriate for different types of assets.
Two Kinds of Insurance
Insurance can be broken into two distinct categories:
- Insurance you can purchase. When you purchase a piece of commercial real estate, acquiring insurance is easy. You simply pay for it. It is the same for insurance on your car or your life. You don’t have to do much more than find a good agent and purchase the appropriate type of insurance.
- Insurance through education. Choosing the right legal entity is very important to a professional investor. They seek advice from experts like their attorneys and tax advisors to make sure they are achieving the maximum protection for their investments.
With the second form of insurance, you have to invest the time to learn how to use it or find the right members of your team with this expertise.
You can also use intellectual property as another form of insurance. It protects what you create by not allowing others to use it without your permission.
When investing in the stock market, you also have to learn to use insurance. For example, you need to learn how to use put options or call options. Options are not only a form of insurance; they are a form of leverage.
Educated investors are proactive when it comes to asset protection. Always remember that the first rule of insurance is: You can’t buy insurance when you need it. You must always buy insurance before you need it.
What It Really Means to Make a Safe Investment
Whether you turn your money over to a financial advisor or control your investments, there will always be risks involved. However, you increase your investment risk when you have no financial education, don’t understand what you are investing in, let others keep the majority of the returns, depend too much on others to control your investments, and ignore your insurance options.
Your investments are “safer” when you get a financial education, actively invest your money in investments you understand, get the majority of the returns, become your own financial advisor, and make use of the insurance options available for each asset class.
So, what are you going to do today to take control of your money and make better investment choices?
Play it smart,
Editor, Rich Dad Poor Dad Daily