In Robert Kiyosaki's series of books on managing your money, he quotes Rich Dad as comparing investing in stocks like dating, buying investment properties like a marriage, and starting up a business like being married with children. I am beginning to find out how true it is.
Why are buying stocks like dating ? For a start, you can get in quickly and easily. With some capital, you just need a broker, or an online account, and you can start buying stocks right away. There is no huge commitment involved. You can get out as easily, almost instantly if the price is right. For many, the initial decision as to which stock to buy does not involve much thinking or time invested at all. The returns may be small compared to the other investment vehicles though. But once purchased, the stocks themselves require very little maintenance.
My first experience with investing was buying stocks just based on hot tips from friends. As expected, I lost money. Fortunately, I was able to get out fairly quickly though it was an expensive lesson. I have since learnt to be a little wiser. And while I am not of the level to be considered a professional investor, I do hope I am now nearer being called an investor than a gambler. Fans of Warren Buffett will not agree with the above analogy, of course. A true fundamental investor puts in a lot of leg work and spends a lot of time reading and understanding companies before he buys them. And when he buys, he is confident enough to make a substantial investment, and then to ride out the market's ups and downs. Such an investor's holding time is forever.
Now buying a property is quite different. Certainly, it does take a lot more time and running around to find a property that is suitable. One has to find a property in a decent location. The property has to be in a decent condition, with a good rental yield. Some basic work needs to be done to make it suitable for rental. Bankers have to be consulted as not many have the cash to pay for a property without taking a loan. Calculations have to be done to see whether the rental income after deducting costs of the loan, maintenance and so forth make the investment worth the while. But once all the initial groundwork has been settled, most of the time, the investor can then sit back and reap the reward of his efforts as he collects his rental cheque every month. Once in a while, parts of the property break down, or tenants may give some trouble, necessitating some work on the investor's part. It does seem to be a bit like a marriage.
So why is starting a business like being married with a baby ? I guess it means you are now totally committed and stuck ! You have to give birth to a business, nurse it as a baby, pouring time and money into it to help it grow, all this while, not expecting much from it, in the anticipation that one day, it will grow big enough to support you many times over. To take money out of a business too soon would kill it. And just like real children, there is no guarantee the business is going to turn out as you hoped. In fact, nine out of ten businesses fail. It is like bringing up a child only to find he has turned into a useless ungrateful adult who refuses to leave home and prefers to live off his aging parents. With such dismal statistics, people who think about starting businesses are advised to plan to fail ! It has to be factored in. Failing is not enough. One has to learn from the mistakes and change. So following through with this logic, the faster one fails and learns from one's mistakes, the faster one can progress. There is no need to know all the steps to getting from Point A to Point B, as long as you know where Point B is. The steps will slowly come.
So why advise someone to go into a business at all ? It really depends on what the person hopes to achieve in life. For someone who values security, the risks may not be worth it. It may be better to find a good mutual fund and let the professionals handle it. But for those who value freedom, the potential rewards of a good business returning unlimited amounts of money so freeing them from having to work may be worth the risks.
It is up to the individual to decide whether he wants to continue dating for the rest of his life, or commit himself to marriage and possibly children.
Karen Cheong strongly believes that we all need to be educated financially in order to become financially free.
She shares what she has learnt about making money, investing and personal finance in her blog http://www.whymoneymatters.blogspot.com