Tuesday, January 19, 2010

Skepticism: A tool to investing prowess!

Investing, as they say, is not difficult, but requires a little bit of effort.

Skepticism: By definition means, A doubting or questioning attitude or state of mind. If one maintains this doubting state of mind while making investment decisions as well, one can make some really calculated and good decisions.

Here are a few examples that Dhirender Kumar of Valueresearchonline gives for this:
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 buyin g a term insurance and investing somewhere else.

However, if you don't doubt others advice, you may end up buying things that are not as good for your future as they are for other's. So, be a skeptic, doubt/question whatever is told to you about any investment vehicle and then make your decision based on your own research.


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