There Are 5 Levels of Investing... Here's How You Reach the Top One
I recently read an article on “Retirement Success: focus on the paycheck, not the savings number.” I was intrigued. I didn’t know exactly what it meant, so I read it.
The article features an actuary named Vernon who is an expert in numbers, and also a retirement educator. I always like to hear what those guys have to say.
Vernon’s strategy is to not to focus so much on the retirement number, but instead setting up “retirement paychecks that are guaranteed to last the rest of your life.” I thought “Oh, maybe he’s talking about cash flowing assets.”
I read on.
I didn’t have to get much farther down the page before I realized this “retirement educator” was teaching what most finance-gurus teach: a retirement filled with basics and necessities.
“The big picture is to get a feel for what your basic necessities are each month, and your discretionary expenses,” Vernon said. “Then, you want to insure an income that exceeds your basic expenses.”
What he called “retirement success” was simply living to pay for your necessities. By his logic, a retiree who probably worked a majority of their adult life was to live the rest of their life only with the basics. That’s not the way I’d want to live. That’s not the way anyone should live.
Social Security, Pensions, Annuities and Reverse Mortgages were his strategy for success.
This is no way to live.
5 Levels of Investors
Below is my Cashflow Quadrant…
The image informs every different kind of person out there when it comes to their understanding of money.
The E and S side are where 90% of the population live. Uneducated financially. It’s not where you want to be.
Level 1: The Zero-Financial-Intelligence Level
Over 50% of the population in America is the Level 1 investor. The results of a lack of financial education in the school system can be found in this level. Simply put, they have nothing to invest.
Zero financial intelligence = Zero money to invest
There are many people who make a lot of money who fall into this category. They earn a lot—and spend more than they earn.
Level 2: The Savers-Are-Losers Level
As the Federal Reserve and central banks throughout the world print trillions of dollars at high speed, every printed dollar means higher taxes and more inflation. In spite of this fact, millions of people continue to believe saving money is smart. It used to be smart when money was money. Now savers who park their money are the biggest losers.
Level 3: The I’m-Too-Busy Level
This is the investor who is too busy to learn about investing. Most likely a highly educated person who is too busy with a career, family, and vacations. They rely on the expertise of an “expert” to manage it for them. They hope and pray their expert is really an expert.
Level 4: The I’m-a-Professional Level
This is the do-it-yourselfer (they’re from the S quadrant investing in the I quadrant). This investor may do their own research and make their own decisions before they buy and sell a few stocks, often from a discount broker. If they invest in real estate, the do-it-yourselfer will find, fix, and manage their own properties. And if the person is into commodities, they will buy and store their own gold and silver. In most cases, the do-it-yourselfer has very little, if any, financial education.
Level 5: The Capitalist Level
This is the richest people in the world level. The Level-5 investor, a capitalist, is a business owner from the B quadrant investing in the I quadrant.
The capitalist uses other people’s money (OPM) to invest. Once a person knows how to build a business in the B quadrant, success attracts money and it becomes easy to raise money in the I quadrant.
They get their money from Level 2 and Level 3 investors who save their money in banks and pension plans.
5 Types of Investors
Investors, like investing plans, are not created equal. There are different investor types.
- Accredited Investors: As defined by the Securities and Exchange Commission (SEC), this investor earns at least $200,000 in annual income ($300,000 for a couple) and/or has a net worth of $1 million. An accredited investor has access to many lucrative investments that, because of their risk, may be legally off-limits to people of lesser income. Although usually financially educated, accredited investors are not necessarily fully literate. They may be content with security and comfort rather than wealth, and may rely on advisors to develop and implement their financial plans.
- Qualified Investors: This investor is well versed in either fundamental or technical investing. Fundamental investing requires the ability to assess a company’s potential by reviewing financial statements, tracking the company’s industry, and calculating how changes in interest rates and the economy could affect profitability. Fundamental investors use financial ratios (which you’ll learn about later) to assess the strength of a company being considered as an investment.
- Sophisticated Investors: Sophisticated investors build wealth by developing a foundation of assets that generate high cash returns with minimum payment of taxes. Sophisticated investors exercise control over the timing of taxes and the character of their income. They know, for example, to defer paying taxes on capital gains from real estate by rolling over profits to more expensive property. They look at economic downturns as opportunities to pay bargain-basement prices for quality paper assets, and they create deals instead of simply waiting for the right one to come along.
- Inside Investors: Building or owning a profitable business is the primary goal of this investor. Whether as an officer of a corporation or owner of a majority of its shares of stock, the inside investor exercises some degree of management control. By running business systems from the inside, he or she learns how to analyze them from the outside and thereby becomes a sophisticated investor as well.
- Ultimate Investors: The goal of the ultimate investor is to own a business that is so successful that shares are sold to the public. Making an initial public offering (IPO) is expensive and full of risks, yet it allows business owners to cash in on the equity they have built up in the company, while also raising money to pay down debt and fund expansions. The ultimate investor is one who has mastered every rule and enjoys playing the game for its own sake.
Average investors buy packaged paper assets such as mutual funds, treasury bills, or real estate investment trusts (REITs). Professional investors are more aggressive. They create investment opportunities or get in on the ground floor of new offerings, build businesses and marketing networks, assemble groups of financiers to fund deals too large for them to undertake alone, and pick the companies with the most promise for initial public offerings (IPOs) of stock.
Each level of investor and type of investor that you are will determine if your retirement is secure, comfortable, or rich. Which do you choose?