The 5 Types of Investors

The 5 Types of Investors

Which level of investing are you at? The answer could mean the difference between being rich or poor.

Today, there are a lot of people worried about the state of the economy... and rightfully so. Over 40 million people have filed unemployment claims since the start of the COVID-19 crisis. According to CNN, that’s about 25% of the American workforce. The stock market is a roller coaster, dropping 37% in just 1.5 months early in the crisis, and some economists are predicting GDP to shrink nearly 30% in Q2.

Given all this uncertainty, many investors are also afraid and confused. Should they sit on the sidelines? Should they sell and scoop what they can? Should they buy more? When is low, low? When is high, high?

I can’t give you the answers on when and where to invest, but I can tell you one thing. Your level of investment knowledge will determine how you fare in this crisis. If you are a low-level investor, meaning you have a low level of financial IQ, you could really lose it all if you’re not careful. If you are a high-level investor, meaning you have a high level of financial IQ, this might be the biggest opportunity of your lifetime.

Understanding the different investor levels

As I wrote in Rich Dad Poor Dad, my rich dad often said, “If you are a true investor, it does not matter if the markets are going up or coming down. A true investor does well in any market condition.” In other words, your success is not dependent on the market, but on you.

Success or failure, wealth or poverty, depends solely on how smart the investor is, i.e., what level of investing you are at. A smart investor will make millions in the stock market. An amateur will lose millions.

So what level of investor are you? Below, I’ve listed five levels of investors. In Rich Dad Poor Dad, I write about my real dad. My real dad was very educated, worked hard, and made a good income. However, he held traditional views about money and as a result ended up struggling financially all his life–I call him my poor dad. He was in the first two levels of investors.

In Rich Dad Poor Dad, I also write about my rich dad. My rich dad, (my friend’s dad) did not have a college degree, also worked hard, but he thrived financially. Unlike my poor dad, he had a rich mindset and thought about money very differently and as a result ended up being one of the richest men in Hawaii. My rich dad was a level five investor.

Take a few minutes, be honest with yourself and determine which investor level you are at. Before you can reach your dreams you’ve got to be honest with where you are starting from.

Investor level 1: The Novice

If there is nothing in your asset column with no income coming in from your investments, and you have too many liabilities, then you are starting at the bottom level, ground zero.

If you are deeply in bad debt, your best investment right now might be to get out of bad debt.

There is nothing wrong with being deeply in bad debt, unless you do nothing. After I lost my first business, I was nearly a million dollars in debt. It took me almost five years to reach zero. In many ways, learning from my mistakes and taking responsibility for my mistakes was the best education I could have asked for. If I had not learned from my mistakes, I would not be where I am today.

At this level, you also likely have little-to-no knowledge of money and investing. Another great investment at this level is to simply start investing in your financial education. Read books, attend lectures, read the financial section of the paper, and seek out coaches and mentors. Another great (and fun!) place to start is our free, online version of CASHFLOW Classic, the game that makes learning to invest fun.

Investor level 2: The Saver

Most people were taught that being financially responsible means being a saver. If you are a saver, you’re a level two investor. As a saver, you need to be very careful, especially if you are saving money in a bank or in a retirement plan. In general, savers are losers.

The U.S. dollar has lost 84% of its value since 1971.

Saving is often a strategy for people who do not want to learn anything. It takes no financial intelligence to save. You can train a monkey to save money.

The risk in saving is that you learn little. And if your savings are wiped out, either by market decline or devaluation of the money supply, you wind up without money and without education.

Remember that the U.S. dollar has lost 84% of its value since 1971. It will not take long to lose the rest of its value. While it’s true that savers do sometimes enjoy interest on their money, the interest rates themselves rarely keep up with inflation rates. It’s a losers game.

If you are a saver, I suggest taking a few courses on investing, either in stocks or real estate, and see if anything interests you. If nothing interests you, then keep saving... and praying.

Remember that the bond market is the biggest market in the world simply because most people and businesses are savers, not investors. This may sound strange to savers, but the bond market and banks need borrowers.

Investor level 3: The Amateur

This level is similar to level two, except that this level invests in riskier instruments, such as stocks, bonds, mutual funds, insurance, and exchange-traded funds.

This is amateur investing at it’s best. A person at investing level three understands that they need to invest, but they don’t really know where or how to invest. So, they default to what is easy and right in front of them: 401(k)s and easy investments like mutual funds. Often they also have a financial advisor, who is really just a salesperson for financial companies.

The risk at level three of investing is that, if the economy crashes, the investor loses everything—and learns nothing. Why? Because nearly everything the investor has is bound up in one asset class—paper assets, a.k.a., the stock market. They are not truly diversified. And because they have advisors make decisions for them, they don’t understand what went wrong and why.

If you are ready to move out of level three, invest in your financial education and start to take control of your money. Once you’re ready to start making your own investment decisions rather than letting an advisor do it for you, then level four is a good level for you.

Investor level 4: The Professional

Very few people invest the time to learn and manage their own money. But once you get to that point, you’ve become a professional investor. The key to success at level four is lifelong learning, great teachers, great coaches, and like-minded friends.

Level four investors take control of their lives, knowing that their mistakes are their opportunities to learn and to grow. The fear of investing does not frighten them. It challenges them.

Once you reach level four of investing, you begin to see opportunities where others don’t and the fear of failure drops significantly. Many level four investors are looking at today’s economy and getting excited that they could make a fortune on the other side of it. Level three and below are running for the hills...and that’s just what a level four investor wants.

Investor level 5: The Capitalist

To me, being a capitalist investor at level five is like being at the top of the world. The world is your oyster. The world has no borders. In this world of high-speed technology, it is easier than ever to be a capitalist in a world of plenty.

Not only do level five investors make their living from their investments, but they also multiply their wealth exponentially by putting the velocity of money to work for them. My friend Tom Wheelwright describes velocity of money as “compound interest using someone else’s money.” Capitalist investors understand how to use other people’s money (OPM), to make great investments in multiple places, keeping money moving fast to make great amounts of it.

If you are at this level, keep learning and keep giving. Remember that true capitalists are generous because a successful capitalist knows you must give more to receive more.

Level up your investing!

What type of investor do you want to be?

One great thing about freedom is the freedom to choose to live the life you want to live.

It’s your choice but you can’t do it alone. That’s why I have my Rich Dad Coaches and Rich Dad Classes.

Regardless of what level you find yourself you can always learn more and take action.

Original publish date: September 03, 2013