Financial education is just like a recipe, some people are willing to share it and some people refuse to for various reasons. Some people are afraid if they share them, they might 'lose' their exclusive-ness. Only with some exceptions, sharing your recipe is usually beneficial.
Robert Kiyosaki has been generous enough to share his story with the world. Some people ONLY see the side that Robert is making tons of money selling his books, games, seminars and other various products, and those are the people who may lose out in the current world of the information age and capitalism.We live in the world where capitalists or entrepreneurs thrive and lead, not realising this would be a huge mistake. These are the people leading the pack of being extremely wealthy because they are 'current'. Robert in most of his books explained the old theories of going to school, getting a job, buying a house and saving for retirement, he has made it clear not being 'current' is causing millions of people to lose out. Robert's books have transformed the way millions of people think and if they were all lies or a false marketing plot, he would be broke and his books would no longer sell. Today, he is one of the world's bestselling authors.
There are people who discourage me from sharing powerful tips and advice, but if a person like Robert can take the time to do it, I guess I can spend a little time sharing what I know. Ultimately, Robert is trying to bring changes through different means as it is shown not one man nor one country can make a change to this world. Leaders of the world be it Barack Obama or George Bush, can only do so much, the rest is up to the people themselves. You can have Steve Jobs or Bill Gates as your mentor, but if you don't have what it takes, you won't succeed. Many people view leaders as salvation and hope for the future and not knowing it is themselves who will determine their future.
This post will discuss on the investments people make and whether they are taking into consideration the four perspectives (earlier posts). Also, I will write about why Robert prefers real estate over other classes of investments.
In finance courses, we learn to diversify out portfolios. It means we minimise or eliminate the firm-specific risks and only expose ourselves to systematic risk. We protect ourselves by making sure we have the best risk-return trade off. One of the biggest mistakes most investors make is diversifying over one asset class; paper assets. When the financial crisis happened in 2007, being 'diversified' or not, most investors were wiped out. Robert questioned the education the world was receiving because despite the principle of diversifying over stocks in different industries, investment grade bonds from around the world and mutual funds who are supposingly one of the best diversified investments, investors lost when the markets went down. So how can it be diversifying if it didn't protect the investor when markets headed south?
Despite numerous successful investors like Warren Buffett and Peter Lynch, there are pitfalls in equities. First of all, I would like to note I've seen equities make fortunes for many people and I personally like equities. There are millions of people today whose wealth and retirement depend on the performance of the equities market. Doesn't that sound risky? In the event the market performs badly, the investor goes from rich to poor or his/her retirement plans gets postponed indefinitely, or until the market recovers, which is never a certainty. An investor usually has no control over the markets, and allowing it to determine their wealth and retirement is just plain risky and not logical. How about investing for the long term? Many people in the world recommend doing this but it may not be the best advice. Robert noted the lost decade from the 2000-2010 where the returns on the stock index was close to zero. Although the market MAY have a good decade ahead, there's still a big argument why equities may not be the answer to growing wealth and certainty. On a side note, the next recession might not be far away. For the case of equities, the wealth of the richest people in the world have grown tremendously over the last decade (despite the market returns), showing that success can achieved through knowledge, foresight and good decision making.
Next, you don't need to be a mathematician to know it is harder to gain after a loss. If you lose 50% of your money, it takes a 100% return to break even. If you lose 75% of your money, it takes a 300% return to break even. How can an investor take this huge risk of losing? I must note losing more than 50% is not hard in current market conditions where the markets are full of volatility and probably edging to another downturn. So think about it, how much of your wealth and savings for retirement are being determined by the equities market? Relying solely or highly on equities is too risky for anyone and believing the market will always perform the long term is being naive.
Capitalism has changed the world, it created entrepreneurs and capitalist who used their intelligence to become extremely wealthy. Many people know Thomas Edison as the inventor of the light bulb, but less knew that he was very wealthy. People wouldn't be surprised when they know this because capitalism rewards people who are unique and people who bring new ideas to the world. The big downside to capitalism is the increasing gap in wealth. We see the world improving with so much new technology and breakthrough but rich are getting richer and poor are getting poorer. People who do not understand the rules of capitalism are being left out and only education will help them get back on track. There were two simple illustrations by Robert which delivered the message.
The first was the monopoly game. The lesson was the game is won by owning more properties than anyone and NOT by collecting $200 each round. It's very straightforward, the people who own the properties are the ones who win eventually not the people who grew on the $200.
The second was being the different side of the table. On the interview table, most people only think about BEING the interviewee, not the interviewer. This is because the education system is creating employees rather than employers. Most of us think of getting hired rather than hiring people.
The Real Estate Advantage
Robert loves real estate because it made him a big fortune. He doesn't dislike other classes of assets, he just prefers real estate. One reason being real estate fulfills his debt, taxes, inflation and retirement argument.
Debt
Real estate is probably one of the few investments financial institutions are willing provide finance. The important thing about debt is, it is "NOT your money". The biggest upside is being able to undertake investments while not being wealthy. Although this is subject to knowledge and experience, creating a portfolio of good debt generating positive cash flows is the key main advantage.
Taxes
As I wrote in my previous post, earned income in the form of salaries and wages are the most highly taxed because of limited deductions available. In real estate, the cost of financing and costs relating to the property can mostly be deducted, thus having to pay much lesser in taxes.
Inflation
In the current world of stimulus and quantitative easing, money is worth lesser by the day. The prices of everything is going up. Although the theory of prices of real estate only going up has been completely dispelled, investing in real estate remains one of the best hedges against inflation. Real estate being 'real' reduces risk of owning 'money' which is no longer money. Higher inflation also lead to higher rents.
Retirement
I have mentioned on the uncertainty on depending on equities. Robert has proven real estate is able to ward off the uncertainty during tough market conditions. His strategy has worked through the financial crisis and is doing even better today. Robert chose his real estate which would be in demand in any market condition namely the energy sector where demand does not significantly slow. During the crisis when credit was frozen, people could only afford to rent houses. This put Robert at an even better position where he could even raise rents, increasing his cash flows and adding more real estate to his portfolio. This might be many people's answer to securing retirement.
Taking everything into account, it still does not mean real estate is the investment for anyone. Furthermore, like equities, not all real estate are equally good investments. Robert also notes it is a fantastic time to own houses in America because interest rates are at a record low, housing prices have dived and most importantly, it's a good time to get a deal on financing. For the rest of the world, whether the economy will worsen or not, investing should still be on the menu. For real estate, it's all about hard work doing research and improving your knowledge. Not having sufficient homework done can make a very good piece of real estate becoming a bad deal. Thanks for reading.
~deyao~
