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A Doubters' Guide to Power Investing

Being a sceptic and backing that up with mathematical abilities can make for a better investing experience

There are few things in this world that can be done well without any hard work at all and unfortunately, investing isn't one of them. Choosing a suitable investment requires that you put in a little bit of effort in learning some things. There is a great desire among investors to be given ready-made investing solutions, and many businesses claim to do so. Unfortunately, unless you have learned some basics, you are unlikely to be able to even evaluate these claims. 

I'm sorry if what I'm saying sounds like a harsh thing to say, but there are some basic skills you will have to learn. If, as an investor, you are unwilling to put in this effort, then you are going to make wrong choices that will harm your financial interests. Your savings are important, and deserve more time and effort than most of us are generally willing to put in. 

Fortunately, what you need to learn is not very complex. Based on my experience of interacting with investors, there are two crucial components that are most often missing from the armoury that individual investors bring to the task of making investment decisions. These two are scepticism and arithmetic. It's an odd pair, but it supplies two crucial inputs. The scepticism encourages you to make your calculations and comparisons between investments rather than accept what you are being told by the seller; and the arithmetic empowers you to actually do such calculations. 

For example, let's say that a fund distributor wants you to buy a fund on the basis that it gave wonderful returns over the last six months. You could be impressed and just put down your money. Or, you could be sceptical, find out returns over different periods and calculate the effective rate of return, come to the conclusion that other types of funds would be better and invest in that alternative instead.

A perfect example would be when you are being sold a complex product, unit-linked insurance policies (ULIPs) being the perfect example. Typically, you will be told that you will pay charges under different heads like 'premium allocation', 'fund management', 'mortality charges' and so on. If you are not suitably empowered with both scepticism and arithmetic then you would just be impressed by the returns projections shown to you by the agent. On the other hand, if you were empowered with these two qualities, then you would reduce the entire stream of charges and payments and returns to a single rate of return. Then you would see how this rate of return would be impacted if the reality of market returns would prove to be a little less rosy than the insurance company's projections. Then, you would calculate whether buying the ULIP would be better, or buying a term insurance and investing somewhere else.

However, without being a sceptic, which leads to doubting others' claims, and not possessing mathematical abilities to check those assertions, you would most likely choose investments that are probably going to bring profits to others, rather than safety and returns to you. It's not difficult, but it does take a bit of effort and attention. But no more than your money deserves.