Power Investing: 4 Problems and 4 Solutions

Dear Reader,

You must have that little version of yourself sitting on your shoulder giving unsolicited advice. I know I do.

He usually chimes in at the most inconvenient time. You want to lose weight, but he says, “Let’s stay home and watch tv.” You want to try a new hobby, but he says, “You don’t have any talent.” You want fiscal freedom, but he says, “You’re going to be poor forever.”

He makes you feel like you aren’t good enough and can’t succeed. This self-doubt can creep up on even the most successful people.

But there is something you can do about him.

Words have the power to make you rich or keep you poor. I’m not just talking about understanding investing lingo like knowing the difference between an “asset” and a “liability.” That is important. But what I mean are the words you tell yourself every day…

Learning how to overcome your self-doubt is one of the best things you can do to ensure you move ahead and achieve your dreams.

#1 The Power of Can’t

Henry Ford said it best: “If you think you can, you can. If you think you can’t, you can’t. Either way you’re right.”

When I was growing up, as you know, I had two contrasting points of view to learn from.

When my poor dad wanted something that “wasn’t in the budget,” he would tell himself, “We can’t afford that.” When we kids wanted an expensive toy or to go on a trip, my poor dad would say, “We can’t afford that.”

My poor dad had a scarcity mindset.

Both of my dads believed in the power of words. But my rich dad took a different approach with this knowledge.

My rich dad believed that our words had the power to shape our reality because they revealed what we thought and believed about the world. Those with an abundance mindset would not state they cannot afford something. And my rich dad wouldn’t allow me to. Instead, he made me think, made me use the power of the words. When I wanted something, he made me ask myself “How can I for that?” to motivate me to put my money to work.

One of the reasons so many investors cannot find great investments that make them a lot of money is that they often say, “You can’t do that here,” or “I can’t afford it,” or “Prices are too high,” or whatever people say to justify their inability to do what others are doing.

#2 The Power of Easy

“The key to becoming rich is to make things easy,” rich dad said one day while he was giving his son and me a lesson on business. “One of the reasons school teachers make less money than businesspeople is because the school system is designed to take the simple and make it complex.”

Not understanding what he meant, I asked for further clarification. Rich dad promptly replied, “The school system takes 1 + 1, simple math, and turns it into calculus. Taking the simple and making it more complex.”

The financial world behaves the same way. They make simple ideas or philosophies and make them more complicated. By doing so, they prey on those who have little-to-no financial education. If you don’t already know calculus it’s impossible to understand.

They want you to understand only what they want you to understand because they can charge high fees to do the work in-between without you realizing it’s so much simpler than you think.

Here’s a classic example:

In Tony Robbins’ book, Unshakeable, Jack Bogle, the founder of the fund Vanguard wrote:

“Let’s assume the stock market gives a 7% return over 50 years,” he began. At that rate, because of the power of compounding, “each dollar goes up to 30 dollars.” But the average fund charges you about 2% per year in costs, which drops your average annual return to 5%. At that rate, “you get 10 dollars. So, 10 dollars versus 30 dollars. You put 100% of the capital, you took 100% of the risks and you got 33% of the return!”

In plain English, that’s a bad deal.

#3 The Rich Make It Easy to Be Poor

Have you ever noticed how easy it is to get a credit card? Have you ever noticed how easy it is to get into bad debt?

As I wrote in a recent issue, Gary Cohn blamed investors for the 2007-2009 crash as much as he blamed lenders. He asked, “Was the waitress in Las Vegas who had six houses leveraged at 100 percent with no income, was she reckless and stupid? Or was the banker reckless and stupid?”

As revealed later, banks were preying on the lack of financial education by pushing high interest rate loans. The borrowers were just doing what the lenders said they could do.

When Kim and I were building our fortune, we ran into trouble with bankers because we had too many investment properties. Even though they were all positive-cash-flow investments, the bank wanted to call some of our loans because we had too much good debt. At the same time the bank was concerned about our multimillion-dollar investment portfolio, they were eager to give us a new credit card as well as give us a loan for a new car.

In other words, our banker was concerned that we had too much good debt, but they wanted us to load up with more bad debt.

Why is that?

#4 Investing without Guarantees

Why are millions of investors willing to pay a little money each month without any guarantees that the money will be there in the future?

Why are millions of investors so willing to lose money each month rather than make money each month?

While many average investors are willing to gamble on making money in the future, a power investor wants guarantees on their returns today.

Because many investors have been brainwashed to believe that their money is safe in a savings account, 401(k) or a mutual fund.

In my opinion, “safe” investments might be the riskiest of them all.

Warren Buffett says, “Risk is not knowing what you are doing.” The key word is you, not the investment.

In the world of investing, there are no investments that are 100 percent guaranteed. There is no investment that is absolutely safe (safe meaning “free from losses”). There is no risk-free investment.

When you invest your money, you will win, and you will lose. That is a guarantee.

There are things you can do to reduce the risk and increase the safety:

  1.    Get financially educated
  2.    Actively investing your money and gaining hands-on experience
  3.    Have control of your investments
  4.    Fire your financial adviser—become your own financial adviser.

As always, if it looks too good to be true, it probably is.

Play it smart,

Robert Kiyosaki

The Daily Reckoning