The 7 Levels Of Investors
The following are some excerpt from the book The CASHFLOW Quadrant by Robert Kiyosaki. It's a great book that I highly recommend that you read and apply. I am going to focus on the introduction and level 4 investors.
The 7 Levels Of Investors
My rich dad once asked me, “What is the difference between a person who bets on horses and a person who picks stocks?”
“I don’t know,” was my response.
“Not much,” was his answer, “Never be the person who buys the stock. What you want to be when you grow up is the person who creates the stock that brokers sell and others buy.”
For a long time, I did not understand what my rich dad really meant. It was not until I started teaching investing to others that I really understood the different types of investors.
A special thanks goes to John Burley for this chapter. John is considered one of the brightest minds in the world of real estate investing. In his late 20s and early 30s, he purchased more than 130 homes using none of his own money. By the time he was 32, he was financially free and never had to work again. So, like me, he chooses to teach. But his knowledge goes far beyond just real estate. He began his career as a financial planner, so he has a deep understanding of the world of finance and taxes. But he also has the unique ability to explain it clearly. He has the gift of taking the complex or abstract and making it simple to understand.
Through his teaching, he developed a way to identify investors into six categories by their level of sophistication in their investing as well as their differences in personality traits. I have revised and expanded his categories to include a seventh.
Using this identification method in concert with the CASHFLOW Quadrant has helped me teach others about the world of investors. As you read about the different levels, you will probably recognize people you know at each level.
LEVEL 4: LONG-TERM INVESTORS
These investors are clearly aware of the need to invest. They are actively involved in their own investment decisions. They have a clearly laid out long-term plan that will allow them to reach their financial objectives. They invest in their education before actually buying an investment. They take advantage of periodic investing and, whenever possible, invest in a tax-advantaged way. Most importantly they seek out advice from competent financial planners.
Please understand this type of investor is not what you would think of as some big-time investor. Far from it. It is doubtful that they are investing in real estate, businesses, commodities, or any other exciting investment vehicles. Rather, they take the conservative long-term approach recommended by investors such as Peter Lynch of Fidelity’s Magellan Fund fame, or Warren Buffett.
If you are not yet a long-term investor, get yourself there as fast as you can.
What does this mean?
At this level, keep it simple. Don’t get fancy. Forget the sophisticated investments. Just do solid stock and mutual fund investments. Learn how to buy closed-end mutual funds soon, if you haven’t already. Don’t try to outsmart the market. Use insurance vehicles wisely as protection but not as wealth accumulation. A mutual fund like the Vanguard Index 500 fund, which in the past has outperformed two-thirds of all mutual funds year-in and year-out is worth using as a benchmark. Over 10 years, this type of fund may give you a return that exceeds 90 percent of the “professional” mutual-fund money managers. But always remember, there is no “100 percent safe investment.” Index funds have their own inherent tragic flaws.
fund). Sit down with your loved ones and work out a plan, call a financial planner or go to the library and read about financial planning, and start putting money away (even if it’s only $50 a month) for yourself. The longer you wait, the more you waste one of your most precious assets… the intangible and priceless asset of time.
An interesting note. Level 4 is where most of the millionaires in America come from. The book The Millionaire Next Door describes average millionaires as driving a Ford Taurus, owning a company and living within their means. They study or are informed about investing, have a plan, and invest for the long term.
They do nothing fancy, risky or sexy when it comes to investing. They are truly conservative and their well-balanced financial habits are what make them rich and successful over the long haul.
For people who don’t like risk, and would rather focus on their profession, job or career, instead of spending a lot of time studying the subject of investing, Level 4 is a must if you want to live a prosperous and financially abundant life. For these individuals, it is even more important to seek the advice of financial planners. They can help you develop your investment strategy and get you started on the right track with a long-term investing pattern.
This level of investor is patient and uses the advantage of time. If you start early and invest regularly, you can make it to phenomenal wealth. If you start late in life, past age 45, this level may not work, especially between now and the year 2010...
WARNING
Anyone with the goal of becoming a Level 5 or 6 investor must develop their skills FIRST as a Level 4 investor. Level 4 cannot be skipped on your path to Level 5 or 6. Anyone who tries to become a Level 5 or 6 investor without the skills of a Level 4 investor is really a Level 3 investor… a Gambler!
If you still want and need to know more financially and continue to be interested in pursuing your financial freedom, read on. The remaining chapters will focus primarily on the characteristics of someone in the “B” and “I” quadrants. In these chapters, you will learn how to move from the left side of the Quadrant to the right side easily and with low risk. The shift from the left side to the right will continue to focus on intangible assets that make possible the tangible assets on the right side of the Quadrant.
Before going on, I have one last question: To go from homeless to millionaires in less than 10 years, what level of investor do you think Kim and I had to be? The answer is found in the next chapter, where I will share some learning experiences from my personal journey to financial freedom.
The 7 Levels Of Investors
My rich dad once asked me, “What is the difference between a person who bets on horses and a person who picks stocks?”
“I don’t know,” was my response.
“Not much,” was his answer, “Never be the person who buys the stock. What you want to be when you grow up is the person who creates the stock that brokers sell and others buy.”
For a long time, I did not understand what my rich dad really meant. It was not until I started teaching investing to others that I really understood the different types of investors.
A special thanks goes to John Burley for this chapter. John is considered one of the brightest minds in the world of real estate investing. In his late 20s and early 30s, he purchased more than 130 homes using none of his own money. By the time he was 32, he was financially free and never had to work again. So, like me, he chooses to teach. But his knowledge goes far beyond just real estate. He began his career as a financial planner, so he has a deep understanding of the world of finance and taxes. But he also has the unique ability to explain it clearly. He has the gift of taking the complex or abstract and making it simple to understand.
Through his teaching, he developed a way to identify investors into six categories by their level of sophistication in their investing as well as their differences in personality traits. I have revised and expanded his categories to include a seventh.
Using this identification method in concert with the CASHFLOW Quadrant has helped me teach others about the world of investors. As you read about the different levels, you will probably recognize people you know at each level.
LEVEL 4: LONG-TERM INVESTORS
These investors are clearly aware of the need to invest. They are actively involved in their own investment decisions. They have a clearly laid out long-term plan that will allow them to reach their financial objectives. They invest in their education before actually buying an investment. They take advantage of periodic investing and, whenever possible, invest in a tax-advantaged way. Most importantly they seek out advice from competent financial planners.
Please understand this type of investor is not what you would think of as some big-time investor. Far from it. It is doubtful that they are investing in real estate, businesses, commodities, or any other exciting investment vehicles. Rather, they take the conservative long-term approach recommended by investors such as Peter Lynch of Fidelity’s Magellan Fund fame, or Warren Buffett.
If you are not yet a long-term investor, get yourself there as fast as you can.
What does this mean?
- This means that you sit down and map out a plan.
- Get control of your spending habits.
- Minimize your debt and liabilities.
- Live within your means and then increase your means.
- Find out how much invested per month for how many months at a realistic rate of return it will take to reach your goals.
- Goals such as: At what age do you plan to stop working?
- How much money will you need per month?
- Go to www.richdad.com/resources/tools download the The Financial Statement complete it and update it weekly to see if you are moving closer or further away from finical independence.
At this level, keep it simple. Don’t get fancy. Forget the sophisticated investments. Just do solid stock and mutual fund investments. Learn how to buy closed-end mutual funds soon, if you haven’t already. Don’t try to outsmart the market. Use insurance vehicles wisely as protection but not as wealth accumulation. A mutual fund like the Vanguard Index 500 fund, which in the past has outperformed two-thirds of all mutual funds year-in and year-out is worth using as a benchmark. Over 10 years, this type of fund may give you a return that exceeds 90 percent of the “professional” mutual-fund money managers. But always remember, there is no “100 percent safe investment.” Index funds have their own inherent tragic flaws.
- Stop waiting for the “big deal.” Get into the “game” with small deals (like my first small condo that allowed me to start investing for just a few dollars). Don’t worry about being right or wrong at first, just start. You’ll learn a lot more once you put some money down… just a little to start. Money has a way of increasing intelligence quickly. Fear and hesitation retards you. You can always move up to a bigger game, but you can never get back the time and education you lost by waiting to do the right thing or make the big deal. Remember, small deals often lead to bigger deals… but you must start.
fund). Sit down with your loved ones and work out a plan, call a financial planner or go to the library and read about financial planning, and start putting money away (even if it’s only $50 a month) for yourself. The longer you wait, the more you waste one of your most precious assets… the intangible and priceless asset of time.
An interesting note. Level 4 is where most of the millionaires in America come from. The book The Millionaire Next Door describes average millionaires as driving a Ford Taurus, owning a company and living within their means. They study or are informed about investing, have a plan, and invest for the long term.
They do nothing fancy, risky or sexy when it comes to investing. They are truly conservative and their well-balanced financial habits are what make them rich and successful over the long haul.
For people who don’t like risk, and would rather focus on their profession, job or career, instead of spending a lot of time studying the subject of investing, Level 4 is a must if you want to live a prosperous and financially abundant life. For these individuals, it is even more important to seek the advice of financial planners. They can help you develop your investment strategy and get you started on the right track with a long-term investing pattern.
This level of investor is patient and uses the advantage of time. If you start early and invest regularly, you can make it to phenomenal wealth. If you start late in life, past age 45, this level may not work, especially between now and the year 2010...
WARNING
Anyone with the goal of becoming a Level 5 or 6 investor must develop their skills FIRST as a Level 4 investor. Level 4 cannot be skipped on your path to Level 5 or 6. Anyone who tries to become a Level 5 or 6 investor without the skills of a Level 4 investor is really a Level 3 investor… a Gambler!
If you still want and need to know more financially and continue to be interested in pursuing your financial freedom, read on. The remaining chapters will focus primarily on the characteristics of someone in the “B” and “I” quadrants. In these chapters, you will learn how to move from the left side of the Quadrant to the right side easily and with low risk. The shift from the left side to the right will continue to focus on intangible assets that make possible the tangible assets on the right side of the Quadrant.
Before going on, I have one last question: To go from homeless to millionaires in less than 10 years, what level of investor do you think Kim and I had to be? The answer is found in the next chapter, where I will share some learning experiences from my personal journey to financial freedom.
We are always happy to help.
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