The Lie Your Broker’s Been Telling You

Early gains on Wall Street fizzled and sent global stocks lower last week after reports that the U.S. is planning an additional $257 billion worth of tariffs on Chinese goods if upcoming talks between Presidents Donald Trump and Xi Jinping fail to end a trade war between two of the world’s largest economies.

Many stock indexes are already in official correction territory—meaning down 10% from recent highs—as investors worry about corporate earnings and global economic growth.

Is this week’s market activity the sign of another dramatic fall coming in the stock markets?

We’ll have to wait and see.

“Diversification Is for Idiots”

One thing I do know is that “diversification” is a bad idea, especially now.

Warren Buffett, one of the greatest investors alive, says, “Diversification is a protection against ignorance.”

Dallas Mavericks owner, Mark Cuban, said, “Diversification is for idiots.”

Why would these rich and successful entrepreneurs say such things? Because it’s true.

Beyond that, diversification is a zero-sum game. Gains in one class offset losses in another. Sure, it can be safe, but rarely does someone become wealthy by diversifying.

The most successful investors don’t diversify. Rather, they focus and specialize. They get to know the investment category they invest in and how the business works better than anyone else.

For example, when investing in real estate, some investors focus on raw land while others focus on apartment buildings. While both are investing in real estate, they are doing so in different ways.

The reality is that what the general public thinks of when they hear diversification isn’t really diversification at all. Instead, it’s putting all your eggs in different parts of the paper-asset basket.

One of the Sacred Cows of Money is, “Invest for the long term in a diversified portfolio.” This sacred cow needs to be shot. It’s bad investing, and it hurts millions of people— especially when the markets crash.

Change in the Rules of Retirement

The rules changed in 1974 with the passage of the Employee Retirement Income Security Act (ERISA), which opened the door for the 401(k).

Prior to 1974, employees could expect to get a paycheck for life from their employer after they retired, thanks to their defined benefit (DB) retirement plan.

After 1974, employers started moving employees from DB plans to defined contribution (DC) plans, which forced millions of people to become investors without the necessary education.

This led to the rise of financial planners. Today, it takes 30 days to become a financial planner and a year-and-a-half to become a massage therapist, so that should tell you something.

Financial planners essentially are the henchmen of banks and mutual funds to sell you their products, take your money, charge you fees, and use your money to get richer.

When they talk about being diversified, what they really mean is spreading your money around one asset class—paper assets. And when the paper asset markets crash, like they did this week, you lose.

Honest Money Talk

The best way to grow rich is to increase your knowledge about money and how it works— to discover the truth about money.

Rich dad. “Your generation’s pension plan could run out of money even if a person puts a lot of money into it, because your generation’s pension plans can be wiped out by a massive stock-market crash, a crash I predict is coming.”

“So, a DB pension plan has protection from a stock-market crash and a DC plan does not?” I asked.

Rich dad nodded. “In most cases, but even DB plans have been known to crash due to mismanagement. But the risks are greater for DC pension plans. The problems are brewing, and soon the moment of truth will arrive. Soon your generation will find out if this new DC plan works or not. The problem is, your generation will only find out if the plan worked after they retire.”

“You mean my classmates may find out at age 65 that their DC plan was inadequate or insufficient?” I asked. “The only way they are going to know is after they retire, when it might be too late to work and replenish it to make up the shortfall?”

Rich dad nodded and continued, saying, “Not only are many of your generation not contributing anything to their plans, but many who are contributing are not contributing enough, and very few are aware how risky stocks and mutual funds are. Mutual funds can fall all the way to zero in a market crash.”

He continued,“Sometime in the future, your generation will get the wake-up call that their DC retirement is not safe, and their retirement sanctuary is at risk. Once your generation realizes that, they will begin to get out of the market, a panic will set in, and the market will crash. If the panic is large, the crash will be the biggest in the world.

“The problem is, too many amateur investors are entering the market, and it is these amateur investors who are the problem—a problem far greater than the flaws in pension reform.  That is why I predict most of your generation will face the real world you are facing today. The only question is: How old will they be when they face it?”

As a young kid, I didn’t really know how this scenario would play out. I asked the same question many of you probably ask, and that’s, “How did we get into this mess?”

Four Asset Classes

True diversification is investing in all four asset classes, which are:

  • Business: Owning a business that creates cash flow.
  • Real estate: Having investment properties that create cash flow.
  • Paper assets: Trading paper assets with technical investments.
  • Commodities: Hedging against markets with commodities such as gold, silver, oil, and more.

As an investor, you should be in all four asset classes, and you should be specializing in one or two. Most people are only invested in paper assets, and they have no knowledge about what they’re investing in, so they listen to financial planners and hold a basket of paper assets for the long term, hoping the market goes up.

And that’s a good idea—if, like Warren Buffett says, you’re ignorant. Or, if like Mark Cuban says, you’re an idiot.

His words, not mine.

If you want to be rich, however, it’s a bad idea.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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The Daily Reckoning