Page 129 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

advisors invest in only one category of asset: paper assets. As the market
crash of August 9 and 10, 2007, revealed, diversification did not protect

paper asset values. The second reason is that a mutual fund is already a
diversified investment. It is a hodgepodge of good and bad stocks. When a
person buys several mutual funds, it is like taking several multivitamins.
When a person takes multiple multivitamins, the only thing that goes up in

value is the person’s urine.
Professional investors don’t diversify. As Warren Buffett says,
“Diversification is a protection against ignorance. Diversification is not
required if a person knows what they are doing.”

My rich dad would say, “Whose ignorance are you protecting yourself
against, your ignorance, your advisor’s ignorance, or your combined
ignorance?”
Instead of diversify, professional investors do two things. One is to focus

only on great investments. This saves money and increases returns. The
second is to hedge. Hedging is another term for insurance. For example, my
300-unit apartment house is required by the bank to have all sorts of
insurance. If the property burns down, insurance pays my mortgage and

rebuilds the building. Best of all, the cost of the insurance is paid out of the
rental income itself.
Two of the main reasons I do not like mutual funds is that banks do not
lend money on them and insurance companies will not sell me insurance

against catastrophic loss if the market crashes—and all markets crash.

On to More Leverage, Higher Returns, and Lower

Risk

Focus, not diversification, is the key to more sophisticated leverage, higher
returns, and lower risk. Focus requires more financial intelligence.

Financial intelligence begins with knowing what you are investing for. In
the world of money, there are two things investors invest for: capital gains
and cash flow.