I read Robert Kiyosaki’s book, Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!, years ago. It’s a decent book, although a bit gimmicky. His discussion of the relationship between the balance sheet and the income statement is good. Basically, you want as much of your income to move to your balance sheet in the form of appreciating, income-producing assets. Although he showed a clear bias toward real estate investing, he saw mutual funds as a viable alternative. In fact, on page 126 of my copy he described mutual funds as “a good clean and simple way of investing.” While he clearly favored real estate investing, for those who didn’t want to learn what he thought was necessary to be successful in real estate, investing in mutual funds, REITs, stocks or bonds was “highly recommended” (p. 127). So far, so good.
Since Rich Dad, Poor Dad was first published in 1997, something has gone horribly wrong. Rich Dad writes articles published on Yahoo! Finance. On May 1, 2007, he wrote an article entitled, Playing the Mutual Fund Lottery. In the article, Rich Dad shares the views of Tom Wheelwright, a CPA and business owner, and describes Mr. Wheelwright’s views as “worth sharing.” Here are some of those views:
- Playing the lottery would be better than investing in mutual funds through a 401(k) or IRA
DR Response: Does this need a response?
- A large mutual fund representative claimed the fund earned 20% a year, but the average investor in the fund actually lost 2%
DR Response: I think what he is referring to is the fact that the average return for investors will vary from the fund’s reported return based on when investors buy into and sell out of the mutual fund. That is, a 20% yearly return over a five year period won’t represent the average investor’s return, because the average investor did not have his or her money in the fund the entire five years. This is now tracked by Morningstar.com and is called Investor Return, which Morningstar explains here. For example, LMVTX (Legg Mason Value Trust) reported a 2006 return of 5.9% and an Investor Return of 5.4%. Of course, this is not an indictment of mutual funds. When an investor buys or sells any asset will determine return, and in some cases, an Investor Return is higher than the funds return for a given period. For example, DODGX (Dodge & Cox Stock Fund) reported a 2006 return of 18.5% and an Investor Return of 18.6%. Further, a 20% fund return and 2% Investor Return is difficult to imagine. Hey, Rich Dad, can you tell us which fund and over what period of time?
- The tax advantages of a 401(k) are really a detriment, because you avoid paying taxes when your young (and in a lower tax bracket), and instead pay the taxes when you retire (and probably in a higher tax bracket)
DR Response: None of us knows what the tax brackets will look like when we retire. That said, for many, if not most of us, our retirement income will not put us in a higher tax bracket than we were in during most of our working years, because our retirement income will be less that we were making while employed. And of course, this says nothing about any company match we receive.
- Withdraws from 401(k) accounts are taxed as ordinary income while capital gains and dividends from taxable accounts are taxed at much lower rates
DR Response: This is a valid point, in part, although it misses two significant issues. First, capital gains and dividends have not always received the favorable tax treatment they receive today, and these tax rates could rise in the future. Second, the benefits of earning returns on the deferred taxes make up this difference in tax treatment.
- Investments in mutual funds outside of 401(k)s and IRAs are also bad, because they result in capital gains taxes when fund managers trade stock, even when the fund goes down in value.
DR Response: Oh, brother. Rich Dad, when investing in mutual funds in a taxable account, you need to consider the funds turnover–that is, how much of the fund’s investments the manager buys and sells each year. The lower the turnover, all things being equal, the lower the capital gains tax. Fund families offer tax-managed funds that are great for taxable accounts, and ETF’s are also a tax-managed alternative.
- The lottery is gambling, but so is a mutual fund. We have no control over the stock market and neither do fund managers
DR Response: We don’t have control over the residential or commercial real estate market, either. We don’t have control over interest rates or inflation. I guess Rich Dad won’t be investing in real estate any more. True, there is a lot we don’t have control over, and there is a lot we don’t know. That’s one of the reasons we do invest in a diversified portfolio of stocks and bonds over a long period of time.
- Most of a fund’s earnings support investment advisor’s and fund manager’s retirements
DR Response: A fund’s expense ratio is disclosed in its prospectus and many websites. The weighted average cost of my mutual funds is 47 basis points (just under 1/2%). There certainly are mutual funds that are far too costly, but this should not be viewed as an indictment of the entire industry.
This quote best summarizes the article: “But isn’t there a better chance of making money in athan there is in the lottery? Hardly.” Rich Dad, I’m not sure what’s happened to your thinking since you published Rich Dad, Poor Dad, but this is an open invitation for you to explain here at The Dough Roller just what in blazes is going on!