One week ago, I wrote an article (Rich Dad Gives Lousy Advice) that was critical of Rich Dad, Poor Dad author Robert Kiyosaki’s comparison of mutual funds to playing the lottery. I’ve grown more and more concerned with the “advice” he’s been dishing out on Yahoo! Finance lately. Frankly, it’s dangerous, and I extended an invitation to Kiyosaki to explain here on The Dough Roller “just what in blazes is going on.” Well, it turns out that his article comparing mutual funds to the lottery was all a big joke (or was it?).
In an article posted on Monday, June 11, Kiyosaki writes that his previous article was a joke and that folks like me (and thousands of others, apparently) just didn’t get it. Here’s what he wrote:
While the piece was written in jest, Tom made valid points about why retirement plans filled with mutual funds are risky. As expected, the reader response was both positive and negative. Some people just didn’t get the joke, or couldn’t learn from its absurd extremism.
Well, hold on there, Mr. Rich Dad, was it a joke or not? I think not, as he couldn’t go even one paragraph without bashing mutual funds, again:
Obviously, the lottery is for losers, casinos are for gamblers — and mutual funds are for dreamers. While there are some good funds, for the most part the only people getting rich from them are a few key employees of the mutual fund companies.
The article only gets worse as Rich Dad goes on to write yet another piece about the horrors of mutual funds. While there are advantages and disadvantages to mutual funds, as there are with ANY investment (and yes, Rich Dad, even real estate), the criticisms he levels against mutual funds are simply misguided and naive. Let’s take a look:
Taxes: He first raises the tax issue again, writing that mutual fund investors are being “taken to the cleaners not only by the fund companies but also by the federal government.” [Ok, DR, just take a deep breath, calm yourself, and respond dispassionately] Rich Dad is right to note that taxes are a major consideration with mutual fund investing, as they are with any investment. Of course, this only applies to mutual funds held in a taxable accounts. Fortunately, there are several things mutual fund investors can do to defer taxes:
- Buy Tax Efficient Funds: Many funds are managed in such a way as to limit capital gains tax by (1) reducing the amount of selling (i.e., turnover) that occurs within the fund, and (2) where possible, selling positions at a loss to offset gains. Morningstar has tools to help assess the tax efficiency of funds, including tax-adjusted returns data showing after-tax returns and a tax cost ratio, which shows the percentage of an investor’s assets lost to taxes.
- Buy ETFs: ETFs, or Exchange-Traded Funds, are mutual funds that trade like stocks. Because they trade like stocks, they generally cost more to purchase than mutual funds, so they are generally best for large purchases, not dollar-cost averaging. However, they are generally more tax efficient than mutual funds. You can read a good summary of ETFs at Money Smart Life, which includes a discussion of the tax advantages of ETFs.
Investing Food Chain: What? Yes, Rich Dad next turns to the investing food chain, which he lists from highest to lowest as follows: capitalist–bankers–bondholders–preferred stockholders–stockholders–mutual fund investors–workers. Apparently, bankers want to be in the “first position,” so that if anything goes wrong with an asset, they get paid first. He also asks whether a bank would loan you or me $1 million to invest in the stock market. He believes the answer would be no, and therefore, the stock market is not an ideal investment. Finally, he notes that in the Enron debacle, the workers were the hardest hit because they were at the bottom of the investing food chain. [Another deep breath, DR. Stay calm and respond with just the facts, no cheap shots at Mr. Rich Dad.]
- Rich Dad makes a valid point, to a degree. In a liquidation, such as bankruptcy, the debt holders get paid before the shareholders. For this reason, stocks are considered riskier than bonds, and stockholders demand a higher return in exchange for the increased risk. This doesn’t mean that stocks or bonds are good or bad. One simply involves more risk, and therefore, a greater potential return.
- Many Enron employees suffered greatly from the loss of a job and the loss of retirement accounts that were heavily invested in Enron stock. As an employee, the risk of losing a job is always present. Of course, everything has risks, and many business owners have suffered similar fates and worse. As for their retirement accounts, many former employees have said the lesson to learn is diversification, not “Where am I on the investor food chain?”
- Rich Dad has argued before that real estate is a better investment than the stock market because banks will lend you money to buy real estate, but not to buy mutual funds. I guess this makes cars a better investment, too, not to mention furniture, electronics, and anything else a bank credit card will buy. Actually, investors buy stocks on margin every day, and corporations borrow from banks using all kinds of paper assets as collateral.
Debt is Safer than Equity: Having established that debt is higher on the investing food chain than equity, Rich Dad concluded that professional investors invest with debt, not equity, because debt is safer: “Professional investors would rather be in a debt position — investing with a banker’s money, for instance — simply because debt is less risky than equity.” [One more deep breath, DR. You're almost done. Use the force.] Yes, debt is safer than equity IF YOU ARE THE LENDER, not the borrower. That’s not to suggest that using debt to finance a business is good or bad. I use debt to finance investments in real estate. But the use of leverage as the borrower doesn’t make my investment safer, it makes its riskier for me. Why do I take on that added risk? The potential for greater returns.
Rich Dad, I will say one thing positive about your articles on Yahoo! Finance, you give us bloggers a lot to write about.