sophisticated investor with others running around

The Difference Between an Average and a Sophisticated Investor

Looking at risk in two different ways—the way of the poor and the middle-class, and the way of the rich.

Over the last few weeks, I’ve been talking a lot about average and sophisticated investors. If I could give one summary, it would be this: The average investor views risk from a completely different point of view than the sophisticated investor. And it is this view of risk that truly differentiates the sophisticated investor.

As my rich dad said, “If you want to become really rich, then one of the things you’ll have to change is your point of view on what you think is risky and what is secure. What the poor and the middle class think is secure, I think is risky.”

The following is a handy chart I created to contrast the difference between an average investor and sophisticated investor’s view of risk. It could be helpful to study it and honestly assess which views are yours today…and which you’d like to work towards adopting.

Average Investor

Sophisticated Investor

Only one financial statement.

Multiple financial statements.

Wants everything in their name.

Wants nothing in their name. Uses corporate entities. Often personal residence and automobile are not in their names.

Does not think of insurance as an investment. Uses words such as “diversity.”

Uses insurance as an investment product to hedge against exposed risk. Uses words like “covered,” “exposure,” and “hedge.”

Holds only paper assets, which include cash and savings

Has both paper assets and hard assets, such as real estate and precious metals. Precious metals are a hedge against government mismanagement of the money supply.

Focuses on job security.

Focuses on financial freedom.

Focuses on professional education. Avoids making mistakes.

Focuses on financial education. Understands that mistakes are part of learning.

Does not often seek financial information and wants it free if sought.

Willing to pay for financial information.

Thinks in terms of good or bad, black or white, right or wrong.

Thinks in financial gray.

Looks at past indicators, such as P/Es and capitalization rates.

Looks for future indicators—such as trends, pro formas, and changes in management and products.

Calls brokers first and asks for investment advice. Or invests alone, asking no one for advice.

Calls broker last, after consulting with plan and team of financial advisors. (Brokers are often part of the team.)

Seeks external security, such as a job, company, or government.

Values personal self-confidence and independence.

If you want to learn more about what the rich think about risk—and why they think that way—Rich Dad Education offers a wealth of classes that range from beginning to advanced, sophisticated investing.

Today is the day to move from average to sophisticated.

Original publish date: November 18, 2014