Understanding Investing (2): Investing is a Plan, not aProduct or Procedure

What gave me a better understanding about investing is the analogies used in Rich Dad’s Guide to Investing (a book written by Robert Kiyosaki, author of Rich Dad Poor Dad) to explain the subject.

Analogy 1: Investment Products are Like Cars and Trucks

“Do you know why there are so many different types of cars and trucks?”

The reason is because there are so many different types of people with different needs. A single person may not need a large nine-passenger station wagon but a family with five kids would need one. And a farmer would rather have a pickup truck than a two-seater sports car.

Now, investment products are often called ‘investment vehicles’. All a vehicle does is to get you from point A to point B. So, an investment vehicle simply takes you from where you are financially to where you want to be, sometime in the future, financially.

Therefore, there are many different investment products, or vehicles, because there are many different people with many different investment ‘needs’, just as a family with five children has different needs than a single person or a farmer.

Analogy 2: Is Like Planning a Trip

Why so?

If you intend to travel, say from Nairobi to New York. Obviously, you know that for the first leg of your trip, a bicycle or car will not do. That means you will need either to a board a plane or take a cruise ship to get across the ocean. And once you reach land, you can walk, ride a bike, travel by car, train, bus, or fly to New York.

All are different vehicles that you will choose to use and none is necessarily better than the other. If you have a lot of time and really want to see the country, then walking or riding a bike would be the best. Not only that, you will be much healthier at the end of the trip. But if you need to be in New York tomorrow, then obviously flying from Nairobi to New York (if there is a direct flight) is your best and only choice if you want to make it on time.

Many people focusing on a product, let’s say stocks, and then a procedure, let’s say trading, but they don’t really have a plan think they investing. But actually they are trading, and trading is not investing. Trading is a procedure or technique.

A person trading stocks is not much different than a person who flips houses (buys a house, fixes it up, and sells it for a higher profit). One trades stocks; the other trades real estate. It’s still trading.

Therefore, investing is a plan, a plan to get you from where you are to where you want to be.

Analogy 3: Like a Trip, it Takes More than One Vehicle

Moving from point A to point B may sometimes require more than one vehicle.

Too many so-called investors get attached to one investment vehicle and one investment procedure. For example, a person may invest only in stocks or a person may invest only in real estate. The person becomes attached to the vehicle and then fails to see all the other investment vehicles and procedures available.

A true investor does not become attached to the vehicles or the procedures. A true investor has a plan and has multiple options as to investment vehicles and procedures. All a true investor wants to do is get from point A to point B safely and within a desired time frame. That person doesn’t want to own or drive the vehicle.

When people are not clear on their own personal financial plans, all these different products or vehicles and procedures become overwhelming and confusing.

Like the earlier example, if you want to go from Nairobi to New York, you have a choice of many vehicles. You don’t really want to own them. You just want to use them. When you board the plane, you don’t want to fly it. You don’t want to fall in love with it. You just want to get from where you are to where you are going.

When you land at Kennedy Airport, you want to use a taxi to get from the airport to your hotel. Once you arrive at the hotel, the porter uses a handcart to move your bags from the curb to the room. You don’t want to own or push that handcart.

Likewise, many people who think they are investors get attached to the investment vehicle. They think they have to like stocks or like real estate to use them as investment vehicles. So they look for investments they like and fail to put together a plan. These are the investors who wind up travelling in circles, never getting from financial point A to financial point B.

What happens when people get attached to their investment vehicles?

They think that their investment vehicle is the only vehicle, or it is the best vehicle. There are people who invest only in stocks as well as people who invest only in mutual funds or real estate.

There is nothing necessarily wrong with that type of thinking. It’s just that they often focus on the vehicle rather than their plan. So even though they may make a lot of money buying, holding, and selling investment products, that money may not take them to where they want to go.

So, what’s the conclusion?

You need an investment plan. And your investment plan will then determine the different types of investment vehicles you will need.

That's a very important lesson. Isn’t it?