Is Mutual Fund Risky?

In the “Rich Dad, Poor Dad”, Robert Kiyosaki outlines some of the wealth building principles like leveraging on other people’s time and money, using tax laws to your advantage with corporation.  However, he has concern about investing into mutual funds and is staying away from them.

In an interview with back in 2002, Robert Kiyosaki explained his concern that mutual funds are too risky:

I am very concerned, personally, about the number of people [who] will never be able to retire in their lifetime. Because these 401(k)’s and mutual funds … are so risky, I don’t think people will be able to retire on them. And that’s really sad. There are investors, perhaps 20% of them, typically the wealthier, [whose investments are managed well] . But most people don’t have a prayer — because there’s no Social Security and these mutual funds are so risky.
There’s three different types of income in the world: earned, portfolio and passive, with earned income coming from your job, portfolio income coming from capital gains, generally from stocks and bonds, and passive income from real estate.

Passive income can be taxed at 0%. Portfolio income is taxed at 20% or more. And earned income, once you factor in Social Security and income taxes, actually is taxed at 50%. People look at [federal income taxes] of 30%, but when you tack on [state, Social Security and other cumulative taxes of] 15%, it’s up there. That means that any savings you put away is taxed at 50%. So, why would you do that?

I hate to tell you this, but over the last several months, mutual funds have lost huge amounts of money. It’s going to happen again. I mean, look, the reason I write [about all this] is this: I don’t invest without insurance, and mutual funds have got no insurance from a stock market crash. To me, that’s sad, and I am concerned.

In real estate, my banker requires me to have insurance from catastrophic losses. When I invest in paper assets, whether it be a stock or something, I either put a trailing stop order in, which costs me zero, or I buy an option.

The average person thinks hedge funds, Long Term Capital Management being a base in point, are risky. But the real point is that the average person thinks that mutual funds are safe, and they are actually the riskiest things going. I would never invest in one.

While the rest of us are putting our money into mutual funds and 401(k), Robert Kiyosaki tells of his investing strategy:

There are three assets classes: paper assets, which, and CNBC and Bloomberg cover very, very well. But that’s a very sophisticated person [who] can play that market. And the losses are extreme for the average person.

The second asset class is a business. The reason most people cannot invest that much is because their single greatest expense is taxes. Let’s say you start a little home-based business. At that moment, you start getting the tax advantages of the rich.

And the third point here is real estate, and the reason I like real estate is that I use my banker’s money, so I get leveraged.

So the three factors are: 1) hedging and insurance, 2) minimizing taxes, and 3) using other people’s money. In a 401(k) you are primarily using your own money; my banker will not let me borrow money to buy mutual funds because they are too risky. But my banker will lend me money — because I have good financials — for real estate, with loan terms of 30 years at a fixed percent.

Well, it is indeed a surprise to me that Robert Kiyosaki is staying away from mutual funds.  I would not have thought that mutual funds are risky.  In fact, I know that mutual funds are classified as income generating assets, and therefore are legitimate as an investment tool.  I guess I have to educate myself further on this in order to make a good judgment on whether mutual funds should form part of my portfolio or not.