An Educated Investor is an Insured Investor

An Educated Investor is an Insured Investor

If you are to be a good investor, regardless of what you invest in, you need to understand insurance, or protection from losses. Investing is far less risky when you have insurance.

More Than One Kind of Insurance

There is more than one kind of insurance when it comes to investing. There is insurance for people and property. There is also insurance against market cycles. And there is also insurance against mistakes, omissions, and lawsuits. Professional investors are always concerned about protection. When you turn your money over to a financial expert, one very important question is, "How safe is my money?" Professional investors do not simply "invest for the long term, buy, hold, diversify, and pray."

The rich also use legal entities as forms of insurance. Poor dad was very proud that his house, his car, and his other belongings were in his personal name. In contrast, rich dad held most of his valuable assets in the name of legal entities such as corporations, trusts, and limited partnerships. Because we live in a litigious society, he wanted to personally own as little as possible. To my rich dad, a legal entity was a form of insurance. Today there are even more types of entities available. Different entities are appropriate for different types of assets.

Two Kinds of Insurance

Insurance can be broken into two distinct categories:

  1. Insurance you can purchase
    • When you purchase a piece of commercial real estate, acquiring insurance is easy. You simply pay for it. It is the same for insurance on your car or on your life. You don't have to do much more than find a good agent and purchase the appropriate type of insurance.
  2. Insurance you have to learn in order to acquire
    • Choosing the right legal entity is very important to a professional investor. They seek advice from experts like their attorneys and tax advisors to make sure they are achieving the maximum protection for their investments.

What Are You Working For?

Get Rich Dad's 6 Rules for Investing in Stocks.

With the second form of insurance you have to really invest the time to learn how to use it or find the right members of your team with this expertise.

You can also use intellectual property as another form of insurance. It protects what you create by not allowing others to use it without your permission.

When investing in the stock market, you also have to learn to use insurance. For example, you need to learn how to use put options or call options. Options are not only a form of insurance; they are a form of leverage.

Educated investors are proactive when it comes to asset protection. Always remember that the first rule of insurance is: You can't buy insurance when you need it. You must always buy insurance before you need it.

Download Rich Dad's 6 Rules for Investing in Stocks

Original publish date: October 01, 2015

Join Our Community—1.5 Million Strong

Register for free!