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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Playing the Mutual Fund Lottery

by Robert Kiyosaki

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Posted on Monday, April 30, 2007, 12:00AM

A few weeks ago I was talking with Tom Wheelwright, a CPA and business owner, about why people play the lottery. His comparison of the lottery to investing in mutual funds is worth sharing.

Even though he's not an investment advisor and never presents himself as one, clients continue to ask Tom what to do to prepare for retirement. "Should I max out my 401(k) contribution?" they ask. "Should I open an IRA? Or should I put more in my profit sharing or pension plan?"

According to Tom, and contrary to popular belief, none of these are wise investments. So here, in his own words, are his thoughts on the subject.

Games of Chance

Among other reasons, 401(k)s and IRAs involve putting money into an investment vehicle over which investors have little control. And since most people end up choosing mutual funds as their primary investment within these plans, playing the lottery would be a better way to go.

Gambling away your retirement funds in a government-sponsored game of chance that you have little hope of winning? Sounds crazy, right? Millions of people buy tickets with the same hope. How sensible is it to play the lottery when the chance that you'll lose the money you put in is so high?

But the same could be said of mutual funds. After all, it's also a government-sponsored program that you have little chance of winning. So your chances of retiring on mutual fund investments in your 401(k) or IRA aren't very high, either.

A Taxing Dilemma

I once heard a radio interviewer ask a representative of a large mutual fund about the fund's performance. The rep said it had risen in value by an average of 20 percent per year for the prior two years.

But when the interviewer asked about the average return to the average investor in the fund, the representative responded that the average investor had actually lost 2 percent per year. Why? Because the performance of the market is unpredictable. Compare that to the lottery, where the precise chances of winning and the exact amount of the jackpot are known quantities.

As for the great tax advantages of putting your money into a 401(k) or an IRA, how is it a good deal to get a tax deduction when you're young and in a relatively low tax bracket so you can pay taxes on the money you take out when you're old and retired -- and probably in a higher tax bracket?

Also, consider the difference in tax rates on capital gains and dividends if you're not in a 401(k) or IRA versus the ordinary income tax rates on the earnings when you pull them out of your 401(k) or IRA. 

A Gamble Is a Gamble

So should you just invest in mutual funds outside your 401(k) or IRA? No again. Mutual funds result in capital gains taxes when the fund managers trade them, even though you don't see the money. You have to pay taxes even though the fund may actually have gone down in value.

Here's something else to consider: What about the lost opportunity cost of the money you pay in taxes, which you could've put into other investments? At least with the lottery, you know the exact amount of taxes you can expect to pay if you win, and you only have to pay taxes if you do win.

I can hear you saying, "But the lottery is gambling! And I have no control over whether I win or lose!" You're right -- the lottery is gambling. But so is a mutual fund. You have no control over the stock market and neither does the fund manager. If the market goes down, so does your fund.

No Big Payoff

At least when you play the lottery you recognize that you're gambling. And you don't have the government, financial institutions, and your employer telling you that the lottery is a good investment. And your employer doesn't go so far as to match the amount you put into the lottery like it might with your 401(k).

But isn't there a better chance of making money in a mutual fund than there is in the lottery? Hardly. There may be less of a chance of losing all the money you put into a mutual fund than there is of losing all the money you put into lottery tickets, but you're never going to win big in a mutual fund.

In fact, mutual funds are designed to minimize your returns by creating a "balanced portfolio." If they could minimize the risk of the market itself, that might be OK. But the problem is that nobody can minimize the risk of the market without sophisticated hedge strategies that aren't typically used in mutual funds.

If nothing else, the lottery gives you a chance to win big, and you can sleep at night because you aren't wondering if the chances of winning are going down overnight because of something that happens in Tokyo.

Retire for Real

If you don't like the idea that most of the money spent on lottery tickets supports government programs, you should know that most of the earnings from mutual funds support investment advisors' and mutual fund managers' retirement.

You take all of the risk, you put in all of the capital, but most of the money goes to the fund manager and your investment advisor. Lottery funds go to worthy causes like schools and the arts, so which is better?

Of course, I would never advise a client to rely on the lottery for their retirement, but neither would I advise them to rely on mutual fund investments. For my dollar, the lottery is a lot more fun -- and at least you know it's a gamble.

If you really want to retire, look at other investments and work with someone who's willing to put in the time to help you retire soon and retire rich. Financial freedom is available to those who learn about it and work for it. It's unlikely for those who want to rely on such risky investment strategies as mutual funds.

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1179 Comments

Showing comments 6-35 of 1179<< PreviousNext >>
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  • Yahoo! Finance User - Saturday, April 12, 2008, 3:44PM ET  Report Abuse

    • Overall: 1/5

    Fear mongering by someone trying to get their hands on your money.

  • Steve - Sunday, February 10, 2008, 9:46PM ET  Report Abuse

    • Overall: 1/5

    I read one of Robert Kiyosaki's books (I did not buy it) and it was full of common sense jibber. Most of it was about buying real estate. All those people who listened to him are now in the toilet.

  • **** - Saturday, January 19, 2008, 6:21PM ET  Report Abuse

    • Overall: 1/5

    @ A V: Kiyosaki is rich because he's made a fortune hawking over-priced "financial coaching services" to schlubs, and passing himself off as a published finance guru. While I agree with "look before you leap" (which is typically called "due diligence" in this field of endeavor), there's a reason so many people in the investing and personal finance worlds discount much of what Kiyosaki has to say. Sure, reasonable people should have a multi-pronged investment strategy (those who overbought into Kiyosaki's real estate strategy would be out of luck these days), attempting to discount 401(k), 403(b), and IRA plans is foolhardy.

  • AngelStarSweetie - Friday, January 4, 2008, 4:53PM ET  Report Abuse

    • Overall: 4/5

    Great article. This article is a cautionary tale for people to do their proper homework before investing on any fund/ commodity. I can see a lot of people disagree with Mr Kiyosaki's article. Fine, go ahead and invest in mutual funds. Nobody is stopping you. At least you are investing towards retirement. You're way ahead than millions of Americans who spend away their income on stuff. Good for you. I hope you make a lot of money. Just remember, a lot of what most people call "certified" experts told everyone to invest in real estate and make a lot of money. A lot of people did make a lot of money from that but a lot of people also lost a lot of money from that venture. What Mr Kiyosaki is saying here on the article is to look before you leap. If you really want to invest in mutal funds, great be sure you know how your investment funds would be used and grown to maximize your returns. The lottery analogy was only given for the people who blindly put X amounts of $ to mutual funds and running on auto-pilot. Mutual Fund defenders and supporters do drive good points but there is no need for name calling. You may like or dislike Robert Kiyosaki, but remember, he's RICH and you're NOT. 'nuff said.

  • Jape - Saturday, December 8, 2007, 8:07PM ET  Report Abuse

    • Overall: 1/5

    As you can probably tell from reading this article, Robert Kiyosaki is not now and never was a successful investor. Rather, he made his money by making up sensational crap and then successfully convincing a lot of people buy it. Now he has a financial planner invest the profits he made from selling his tripe. He is a classic "schyster" as my German grandmother would have said (meaning he's a liar and a fraud who preys on his ignorant or trusting neighbors). Robert Kiyasaki's books lead you nowhere and are rife with flat-out nonsense. Here's a piece of reasonable advice: if you want a decent book about successful investing, try reading something written by someone who has been a successful investor. What a jerk.

  • Yahoo! Finance User - Wednesday, December 5, 2007, 4:31PM ET  Report Abuse

    • Overall: 1/5

    Tom Wheelwright is obviously an idiot. He needs to leave the investment advice to the investment professionals.

  • Yahoo! Finance User - Wednesday, November 28, 2007, 1:35PM ET  Report Abuse

    • Overall: 1/5

    i can't believe that such a misleading and poorly written article was published on this website. oh wait, yes i can. this may as well be a thinly-veiled advertising pitch to buy into Wheelwright's business. nowhere does he support any claims, provide useful advice, etc. this whole article is baseless trash.

  • Tobin - Monday, October 22, 2007, 9:01AM ET  Report Abuse

    • Overall: 1/5

    You've got to be kidding?!? Characterize mutual funds as generally risky and high expense, and then advise people to get a financial advisor? You know how those people get their money - it was yours!

  • jnojr - Friday, October 19, 2007, 8:31PM ET  Report Abuse

    • Overall: 1/5

    Robert Kiyosaki is an out-and-out fraud. It is unbelievable how pure stupidity flows from him, and a few Kool-Aid drinkers beg for more.

  • KEVIN - Wednesday, September 19, 2007, 11:53AM ET  Report Abuse

    • Overall: 1/5

    disclosure is always the correct way to talk to America. If mutual funds were not an decent investment then I advise MR K. to stop using any products like soap,food, electricity or any product because behind all them products is an company that is most likely part of an mutual fund so if mutuals funds will not grow over time stop using any products and lets see if your brick and motar will produce results for the average American.

  • JimmyDaGeek - Saturday, September 15, 2007, 8:29AM ET  Report Abuse

    • Overall: 1/5

    If you applied your own logic properly, your column heading would be "Life is a Gamble." Nothing is assured. I suppose you will tell us that every property you ever bought gave you positive returns from the start? How many tenants of yours defaulted on their rents? Can you control that? If you start a business, you are gambling that you can draw enough customers. You can't control that. Yes, the short-term pricing of stocks is random, it's the long-term where the money is made - just like your beloved properties.

  • james - Thursday, August 16, 2007, 5:39PM ET  Report Abuse

    • Overall: 1/5

    Mr. Kiyosaki, what you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent tract were you even close to anything that could be considered a rational thought. Everyone on this site is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

  • Yahoo! Finance User - Sunday, July 8, 2007, 11:58PM ET  Report Abuse

    • Overall: 1/5

    This article is embarassing. Imprecise statements, unsubstantiated opinions, erroneous conclusions...it's disappointing that such a well-known author would publish such an irresponsible piece.

  • Daniel - Friday, July 6, 2007, 10:29AM ET  Report Abuse

    • Overall: 1/5

    Aside from what everyone else has said about the poor advice in this column, I'd like to focus on this statement: "As for the great tax advantages of putting your money into a 401(k) or an IRA, how is it a good deal to get a tax deduction when you're young and in a relatively low tax bracket so you can pay taxes on the money you take out when you're old and retired -- and probably in a higher tax bracket?" The author totally ignores the Roth option in the 401(k) and IRA, which is designed precisely for this scenario. Sure, some mutual funds have lost money. A lot have gained money, too.

  • John - Thursday, June 28, 2007, 4:49PM ET  Report Abuse

    • Overall: 2/5

    Mutual funds are.... by definition.... less risky than most other investments. Comparing them to lottery winnings is buffoonish.

  • DonP - Tuesday, June 26, 2007, 4:17PM ET  Report Abuse

    • Overall: 5/5

    funds slow way to go broke

  • Mark Y - Tuesday, June 26, 2007, 3:31PM ET  Report Abuse

    • Overall: 1/5

    This is the most irresponsible writing I've ever seen. It's slanderous and dangerous advice and I challenge this buffoon to support his contentions with legitimate data. He can't. I've been an investor for nearly 30 years and I've NEVER seen a responsible stock investor go bankrupt. I have seen lots of folks go belly up in real estate, however. Also folks starting their own businesses. Gold? Suckers bet, longer-term. Now, if you want to say that a fund manager's 0.75% (or whatever) per annum is excessive feel free, but it's still a lot less than the 10%-12%/yr in expected growth and you can shop those fees. You can also manage your money yourself, if you're willing to do your homework. But really, for most folks, what they pay a fund manager is about what they'd pay a lawn service. And a lawn doesn't historically appreciate in value more than about the rate of GDP and it's illiquid.

  • David S - Tuesday, June 26, 2007, 11:43AM ET  Report Abuse

    • Overall: 1/5

    In 1985 I went to my reference library and discovered two long term winning funds; Acorn and Mutual Shares. Acorn has yielded around 15% annually since then and Mutual Shares a bit less. I haven't lifted a finger as my assets consistently rose. So choose a fund w/ a long term winning track record. Minimum 10 years.

  • Yahoo! Finance User - Tuesday, June 19, 2007, 12:52PM ET  Report Abuse

    • Overall: 1/5

    You sound like the “Poor Dad”. Your Rich Dad would be ashamed of you for not doing your research before you put pen to paper. You sound like a 5th Grader.

  • Yahoo! Finance User - Monday, June 18, 2007, 12:04AM ET  Report Abuse

    • Overall: 1/5

    Give me a break! I would love to see this CPA recommend that we don't invest for retirement in tax-sheltered accounts. Also, your tax bracket is generally higher while you are working and have an income v. in retirement where you have no earned income. Also, try reading up on the Modern Portfolio Theory...been around since the 1950's a couple of professors won the Nobel Prize for it...Do your research before speaking on something you don't know!

  • Liz - Saturday, June 16, 2007, 7:53AM ET  Report Abuse

    • Overall: 1/5

    Yikes..."Lame Dad" get real. If you are going to write such a misleading article, at least tell us your kidding up front. Oh I forgot you were telling the truth. Why would anyone listen to this advise is beyond me?

  • zenmonk - Saturday, June 16, 2007, 7:11AM ET  Report Abuse

    • Overall: 5/5

    Those who milking the innocent will rate this article poor rating, because it threatens their fat belly. Whoever tells the truth will be likely hung on the cross. The good thing is the freedom of express. Who care of these sharks, if you manage yours on your own.

  • Wolfgang - Thursday, June 14, 2007, 1:29AM ET  Report Abuse

    • Overall: 1/5

    Is Yahoo actually paying RK for this bad and misleading advice? -ws

  • olivier - Wednesday, June 13, 2007, 6:30PM ET  Report Abuse

    • Overall: 3/5

    Again I would refer to a book "the intelligent investor", The problem with mutual funds is that you delegate the financial management of the underlying securities to someone you don't know and pray that this someone will ahe performed a good job when retirement comes. Is that financial safety?

  • Yahoo! Finance User - Wednesday, June 13, 2007, 6:22PM ET  Report Abuse

    • Overall: 1/5

    This article isn't even worthy of one star. I wish I could give it NO STARS! This is proof that just because someone has a CPA, doesn't mean they know what they're talking about. I hope Tom Wheelwright's clients read this article before they entrust their money to him. He is obviously an idiot and so is Kiyosaki for subscribing to his beliefs. Having said that, I do believe that you get out of your retirement what you put into it. Don't expect to retire like a king if you're only investing 50 dollars a month. The market return on your investment is only a part of the equation, the other part is what you put into it. If you want a frothy retirement, then you have to invest aggressively while seeking out a reasonable rate of return relative to risk. The 401k is the best vehicle for most people to accomplish this.

  • MichaelH - Wednesday, June 13, 2007, 5:31PM ET  Report Abuse

    • Overall: 1/5

    This guy doesn't seem too bright.

  • Yahoo! Finance User - Wednesday, June 13, 2007, 2:56PM ET  Report Abuse

    • Overall: 1/5

    The people rating this as 5 stars are bigger idiots than RK himself. This article should be removed from "Yahoo Finance" and added to the "Yahoo Humor" section

  • Jennifer - Wednesday, June 13, 2007, 1:54PM ET  Report Abuse

    • Overall: 1/5

    This is retarded

  • Yahoo! Finance User - Wednesday, June 13, 2007, 1:49PM ET  Report Abuse

    • Overall: 5/5

    The only one who gets it is smartgrl7!!! Anyone who knows Robert's work knows that he speaks in general terms. Will most people have a retirement with mutual funds? Yes! Will it be what they expect? No! Here's an example...I've been working a little over half of my career. I've been investing the "model" amout that was advised by the sliding calculator that stated I would have a million dollars by the time I retire. Barring compounding interest and all the other variables...I'm not even close and won't be when I retire. Employees are workers for large corporations, 401k's are funds that reinvest paycheck back into big business, The employee does not have ultimate controll over thier investments(401k) At least not this type. Educate yourselves on Roberts books and you'll get the bigger picture!

  • Devendra - Wednesday, June 13, 2007, 1:34PM ET  Report Abuse

    • Overall: 1/5

    No Value in this article. Really.

Showing comments 6-35 of 1179<< PreviousNext >>
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