Avoid These 3 Investment Risks If You Want to be a Successful Investor

Avoid These 3 Investment Risks If You Want to be a Successful Investor

The importance of training, control, and knowledge to limit your investment risk

Many people are turned off by investment risk. When I was growing up, that was my poor dad. Because he valued comfort and security, he felt that, instead of investing, smart people got a good job and saved their money.

My rich dad, on the other hand, felt that my poor dad’s way of thinking was the risky one. He aspired to own his own businesses and to invest his money rather than save it.

Investment risk and the CASHFLOW Quadrant

My poor and rich dads’ opposing views of the world are best explained by the CASHFLOW Quadrant, or ESBI.

Pattern for job security image

Each quadrant of the ESBI represents a certain type of person and mindset.

E stands for Employee. An employee values job security, benefits, and a steady paycheck. To attain this, he sells his time to an employer. He does not like risk, nor does he understand how money works. His education is traditional and prepares him to be a good employee.

S stands for Self-Employed or Small Business Owner. An S values independence. He does not have a boss, and works for himself. He doesn’t have a job. Rather, he is the job. The problem for an S is that he cannot take time off. If he does, he stops making money.

B stands for Big Business. A big business owner doesn’t have a job, nor does she own one. Instead, she owns a system. Her mindset is how do I hire others to make money for me in the system I’ve built. She has financial freedom because she is able to stop working and still make money.

I stands for Investor. An investor believes that money can be used to make more money. She is adept at using debt, taxes, insurance, and more to make money passively through investments in assets. She sees the world as one of opportunity and abundance.

Investment risk on the right and left side of the CASHFLOW Quadrant

As you can tell, the ESBI is divided into two sides. E and S are on the left side, and B and I are on the right side.

Those on the left side are often uneducated about money, business, and investing, and they fear risk. It is, however, their lack of education that makes business and investing seem risky.

Those on the right side understand how money and investing work, and they see the world in a much different way. They believe that being an employee or self-employed is actually much riskier than owning a big business or investing because you lack three things: training, control, and knowledge.

My poor dad lived his life on the left side of the ESBI. My rich dad lived his life on the right side. My poor dad struggled all his life and always complained about his financial state. My rich dad grew his wealth each year, and like the game of Monopoly, he traded up his houses for hotels over time.

I studied the lives of both men. I wanted to understand why my poor dad thought there was risk in investing, and why my rich dad didn’t fear investment risk at all. Along the way, I learned three key reasons why my poor dad really thought investing was risky—and why investment risk was a reality for him and others like him.

Investment risk #1: Lack of training

I’ve written before about the three types of education: academic, professional, and financial.

Most people go to school to be trained on how to be an employee or self-employed through academic and professional education. School teaches us things like reading, writing, and arithmetic, all good things and useful for the work world. It teaches us how to execute on orders from our superiors and be where we’re told to be at the right time—the mindset of an employee.

Some people go on to higher education and train to be in high paid professions like being a doctor, lawyer, or accountant. But at the end of the day they are just high paid employees or self-employed. Few people who focus on academic or professional education make the leap from the left side of the CASHFLOW Quadrant to the right side.

Unfortunately, school doesn’t teach how money works, or how to have it work for you. It doesn’t teach you the skills necessary to become a business owner or an investor. Those are skills that you must seek out and teach yourself, starting with the four foundations of financial literacy.

As a result, most people simply lack the training necessary to know how to mitigate investment risk. And without training and knowledge, investing is risky.

Thankfully, Rich Dad exists to help you increase your financial intelligence through our books and games, classes, and coaching.

Investment risk #2: Lack of control

During the last Great Recession, I’m sure that many people came to believe that investing was risky as they watched their stock portfolios tumble. And again, most recently, I’m sure many people were decimated during the global coronavirus pandemic.

The reality is that most people don’t have a true investment plan.

Instead, they work hard and hand over their money to an “expert” who invests it in some mutual funds, stocks, and bonds. The problem is that these types of investments increase investment risk. You have no control. You are at the mercy of the markets and managers. That is a position of risk.

Successful investors, on the other hand, strive for as much control as possible in order to minimize investment risk. In fact, I recently published a post on the 10 key investor controls that a sophisticated investor must have in order to be successful.

That is why I invest in businesses where I have decision-making power, and it is why I love real estate where I can lock in cash flow for long periods of time. In both cases, I have a lot of control over what happens with my investment.

Investment risk #3: Lack of knowledge

Most of us know intuitively that if you want a real deal, you need to be on the inside. You often hear someone say, “I have a friend in the business.” It doesn’t matter what the business is. It could be to buy a car, tickets to a play, or a new dress. We all know that “on the inside” is where the deals are made.

The investment world is no different. As Gordon Gekko, the villainous character played by Michael Douglas in the movie Wall Street, said, “If you’re not on the inside, you’re outside.”

Employees and self-employed people generally invest from the outside, where the investment risk is high. They have limited knowledge of what they are actually investing in.

Those who operate as business owners and professional investors have detailed knowledge of what’s going on inside of their business or their investments. They are the drivers of the business or investment, and because they have the insider knowledge that makes their investment risk much smaller.

How can you minimize your investment risk?

The first step to minimizing your investment risk is to actively work to change your mindset to move from the left side of the CASHFLOW Quadrant to the right side.

That is not to say that you can’t invest on the left side, but it is much harder as there are many forces acting against you, mainly it is very hard to have any control, even if you have training and knowledge. Also, because those on the left side sell their time, they rarely have the availability needed to manage their investments the way someone on the right side does.

Moving to the right side of the quadrant means getting the right training and knowledge, and putting it to use so that you can be in a position of control. This means daily increasing your financial IQ through things like coaching and seminars. Ultimately, however, you must take that knowledge and put it to use. Nothing teaches us better than trying, failing, and trying again.

Moving from a position of risk to a position of security when it comes to investing takes financial education and practice. I encourage you today to take an honest look at your investment position and to take the steps necessary to gain training, control, and knowledge. It will be one of the wisest decisions you can make.

Original publish date: April 29, 2014