As the market continues to tank, I couldn’t help but re-post this article I wrote about Robert Kiyosaki’s useful metaphor for investing.  It resonates pretty strongly today as people continue losing money they invested in stocks.

Would you drive a car without a steering wheel?  What about if it didn’t have brakes?  How about if it didn’t have a gas pedal?  Would you drive a car under any of these circumstances?

Robert Kiyosaki has posed this question to viewers in his television show on PBS.  (You can also read about this analogy in the book Kiyosaki wrote with Donald Trump, Why We Want You to Be Rich.)  In particular, he asked his viewers if they would ever drive a car without any of the following items: (1) a steering wheel, (2) brakes, (3) a gas pedal, (4) a gear shift, (5) a driver’s license, and (6) auto insurance. 

The obvious answer is “no.”  But why is that the answer?

Because it’s RISKY!!  You’d be insane to get in a car that didn’t have a steering wheel.  Ditto if it doesn’t have breaks.  Driving a car with brakes, a steering wheel, a gas pedal, auto insurance, etc., gives you control.  And that control helps you relax while you drive and almost ensures that you will arrive at your destination in one piece.    

While no one in his or her right mind would drive a car that lacks these items, people still engage in other activities in their lives that lack similar precautions and, thus, pose great risks.  One of these activities is investing.

Investing Without Control

Many people invest in stocks and mutual funds because they believe these are “safe” investments.  But the opposite is true.  Investing in stocks and mutual funds is like driving a car without any of the aforementioned items (i.e., steering wheel, gas pedal, brakes). 

The investors who put their money in stocks and mutual funds have no control over their investments.  They turn their money over to someone else (a financial planner, an advisor, etc.) and leave it to the discretion of those people and the markets to make their money grow.  Like Kiyosaki says, what’s worse is that these financial advisers, planners, and brokers don’t have any control either.  They’re just stepping into your shoes, and a lot of them don’t have the expertise you think they have.

(Have you ever wondered why these advisers and brokers recommend to ”diversify”?  It’s because they have no control over your money.  I’m going to write a post about this, but, for now, heed the advice of Warren Buffett: “Diversification is protection against ignorance.”) 

In addition, a lot of investors haven’t researched or learned about the stocks or funds into which they’re putting their money.  They also haven’t received any training at all on stock-investing.  Moreover, they have no insurance in case the market tanks.  If the market heads into a recession or, worse, a depression, they lose their money with no recourse whatsoever. 

So the investor who invests in stocks and mutual funds gives up control (steering wheel, brakes, gas pedal, gear shift), has no training (driver’s license), and no insurance (auto insurance).  This investor is making the exact same mistake made by the driver of a car with no steering wheel, brakes, etc.

Why do investors invest like this?    

Investing Isn’t Risky

People invest in stocks and mutual funds because they think investing, in general, is risky, and they think that stocks and mutual funds are the safest investing vehicles.

The irony is that investing is NOT risky if you take the proper precautions.  Taking those precautions gives you the control you need to make a safe and sound investment.

For example, if you train yourself to learn how to invest in a particular area (like real estate), you lessen your risk.  This is the same as learning how to drive a car: once you learn and obtain a driver’s license, it’s no longer risky for you to drive a car because you know how to do it.

Likewise, if you make sure you have all the tools necessary to invest in a rental property (i.e., an inspector, analysis of rental rates in the area, property tax information, title search, tenant occupancy rates, etc.), you lessen your risk when you buy that property.  This is the same as making sure a car has a steering wheel, brakes, a gas pedal, and a gear shift.  If a car has all those tools, it’s safer for you to drive it.

Investing With Control

Kiyosaki loves to distinguish between investing without control and investing with control.  People who blindly invest in stocks and mutual funds invest without control.  But people who educate themselves financially and learn and understand what they invest in are investing with control. 

Obtaining the proper education and tools before investing in real estate helps you control that investment.  The same can even be said for stocks.  If you research a company, understand its industry, evaluate its financial position, and assess its long-term stability and growth, you will make a safer investment.  (This is what Warren Buffett does.)

Driving a car without all those necessary parts is a great metaphor for investing without control.  People invest like that on a daily basis and are deceived into thinking that they are making “safe” investments.

To obtain control, a financial education is essential.  And learning everything possible about a particular investment will ensure that you have the proper control over your money.  Like Kiyosaki says, it’s control of this kind that separates the rich from the poor.

So the next time you’re thinking of investing in stocks, mutual funds, or anything else, ask yourself whether you’d get in a car that didn’t have a steering wheel, brakes, a gas pedal, or a gear shift.  And ask yourself whether you’d sit next to and trust a driver who didn’t have a license or insurance.

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