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Smart Investing: Understanding the Difference Between Risky and Safe Options

The 411 on savings accounts, mutual funds and 401(k) plans and why insurance matters in all asset classes

Summary

• Don’t be fooled - your investments may not be as safe as you think they are

• The riskiest investments are the ones others make for you

• Having investment insurance is the key to secure investments

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What you may think is a “safe” investment, others might see as risky. For example, many financial planners advise their clients to get into so-called “safe” investments — such as savings plans, mutual funds and 401(k)s.

But are these investments really safe? Let’s take a look:

Are your investments “safe?”

Investment #1: Savings Accounts

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 is worth less and will buy you less in the future.

Plus, how much are you paying in bank fees to have them hold onto 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.

In her book, “It’s Rising Time!,” Kim Kiyosaki writes “by saving money, in many cases, you are losing money.” Not enough people seem to understand that, and end up losing money as a result.

Investment #2: Mutual Funds

A mutual fund is a collection of stocks, bonds and securities, and according to Statista, there are nearly 7,400 mutual funds in the United States alone, and almost 70 million Americans, or 52% of American households, invested in mutual funds in 2023. That’s a lot of people investing in thousands of funds and hoping for a nice retirement. But these same people probably haven't invested too much time into their financial education. After all, you can probably get a higher return on your investment elsewhere.

As John Bogle, the founder of Vanguard and the author of “The Battle for the Soul of Capitalism,” explains, the mutual fund system is failing investors because of the fees (some hidden).

“The financial system put up zero percent of the capital, took zero percent of the risk, and got almost 80 percent of the return…And you, the investor in this long time period, an investment of a lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only about 20 percent of the return.”

Investment #3: 401(k) Plans

A 401(k) is a popular retirement 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 basically 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 at Rich Dad, we don’t encourage the aforementioned “investments” and instead focus on different asset classes— namely real estate investing, commodities (gold and silver), and cryptocurrency. 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. Robert Kiyosaki’s poor dad was very proud that his house, his car, and his other belongings were in his personal name. In contrast, his 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 Robert’s 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:

1. 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 on your life. You don't have to do much more than find a good agent and purchase the appropriate type of insurance.
2. Insurance you have to learn in order to acquire. 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 really 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 beforeyou need it.

How do you make a safe investment?

Whether you turn your money over to a financial advisor or control your own 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?