Get Out of Debt
Most savers think that debt is bad and that paying off the mortgage on their home is smart. And for many people, debt is bad and getting out of debt is smart. Yet, if you are willing to invest some time in your financial education, you can get ahead faster using debt as leverage. But again, I caution you to first invest in your financial education before you invest with debt.
There is good debt and bad debt. The purpose of getting financially smart is to know when to use debt and when not to.
Donald and I love real estate simply because our bankers love to lend us money to buy good real estate--real estate that is well-managed. Of course, there is good real estate and bad real estate.
Savers who invest in mutual funds have a difficult time using leverage, simply because most bankers will not lend money on mutual funds. Why? Apparently bankers think mutual funds are too risky and consider real estate a safer investment.
Just as my poor dad fell behind financially in the early 1970s because he was a saver, millions of people today are falling behind financially for the same reason.
In this economic environment, savers are losers and debtors are winners. You should always be careful when using debt for any reason.
Invest For The Long Term
"Invest in the long term" has many meanings.
- Look at this advice as a sales pitch: "Turn your money over to me for years, and I will charge you fees for the long term." I call it a sales pitch because "invest for the long term" is like the airlines offering you a frequent-flier program. They want you as a lifetime, loyal, paying customer.
- It also means they can charge you fees for the long term. This would be like paying your real estate broker a commission for selling you your house and then paying the broker a residual commission for as long as you occupy the house.
- Mutual funds may not perform as well as other investments due to the fees paid for management of the fund. While I do not mind paying fees, I do not like paying fees for sub-par performance.
Many people invest in mutual funds for the long term. However, mutual funds provide no leverage. As I said earlier, my banker will not lend me millions of dollars to invest in mutual funds, simply because they are too risky. There is also the lack of control (a subject that will be covered later).
One of the differences between mutual funds and hedge funds is leverage. Hedge funds often use borrowed money. Why do they use borrowed money? With borrowed money, you can increase your ROI, your return on investment, if you are a smart investor. In other words, the more of your own money you use, the lower your returns.
There is a time and a place for mutual funds. I invest in them occasionally. But to me, mutual funds are like fast food; it's OK occasionally, but you do not want to make a habit of consuming it.
Diversify, Diversify, Diversify
Warren Buffett, reportedly the world's richest investor, has this to say about diversification: "Diversification is protection against ignorance. (It) makes very little sense if you know what you're doing."
So the question is, whose ignorance are you protecting yourself from? Your ignorance or your financial advisor's ignorance?
Again, there are multiple meanings for the word "diversify." Generally, it means not putting all of your eggs in one basket, which is what Warren Buffett does. To this, I once heard him say, "Keep all your eggs in one basket, but watch the basket closely."
Personally, I do not diversify, at least not in the way the financial planners recommend. I do not buy a lot of different assets. I would rather focus. In fact, the way I get ahead is by focusing, not diversifying.
One of the better definitions I have heard for the word "focus" is using the word as an acronym.
F = Follow
O = One
C = Course
U = Until
S = Successful
This is what I have done. Years ago, I invested in real estate until I was successful. Today, I still invest in real estate. When I wanted to learn about bonds, I invested in them until I was successful. Once I was successful, I decided I did not like the bonds and so do not invest in them anymore. I have successfully taken two companies from startups through IPOs. I made millions and was successful, but decided I did not want to go through that process anymore. Today, I still prefer real estate.
To me, diversification is a defensive posture, so I see very little offensive leverage in diversification.
For most people, diversification is a good strategy only because it protects investors from themselves and from incompetent or unscrupulous advisors.
This traditional financial planning advice of working hard, get out of debt, invest for the long-term and diversify is good for the average investor--the passive investor who simply turns a little bit of money over each month for someone else to manage. It is good advice also for the person who is rich, but rich professionals, pro athletes and rich children with inheritances fall into this group. The key is to find a good financial advisor.
Know, however, that there is very little leverage in following this path--and leverage is the key to great wealth.