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Does investing have to be so complicated?

From a cynical perspective, every profession tries its best to confuse outsiders. This simply allows the profession to appear more esoteric and allows the professionals to charge hefty fees for offering their services.

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6 mins 9 secs
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Last Updated - May 15, 2023
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From a cynical perspective, every profession tries its best to confuse outsiders. This simply allows the profession to appear more esoteric and allows the professionals to charge hefty fees for offering their services. Imagine walking into an investment advisory firm and hearing words like – mezzanine tranche of a collateralized debt obligation, convertible debentures, double no-touch structures, etc. You are bound to walk out of the office thinking that I have no clue about all this, better pay the management/advisory fees to get the promised superior returns. True, right? Nowadays, even mobile phone packages have become so complicated that to get the best deal people might be willing to pay advisory fees. But advice can be a double-edged sword. It is totally dependent on the capabilities of the advisor. This is the hard-earned money we are talking about and therefore having basic investment rules and guidelines become critical not only for maximizing your returns but also taking advice with a pinch of salt.

Be patient

Imagine the first time you sat behind a steering wheel. Felt great, right? You just wanted to zoom across as if you were on the Autobahn. However, reality hits you in a few minutes when you get stuck behind a stream of cars ahead in your lane. Invariably the cars in the adjacent lane seem to be going much faster. So what do you do? Activate your blinker and immediately move to that lane. Now ask yourself this question – how many times after having done this do you notice cars in the original lane moving faster? 8 out of 10 times, right? Finally, you realize that it just doesn’t pay to try and out-smart the other drivers and in doing so you are just increasing your risk of an accident without significantly increasing your speed. That day you settle down into being a much better driver. Ditto with investments. Identify trends, and define broad horizons, but avoid frequent trading. The only companies that benefit from trading too frequently are the broking and advisory companies. The more you trade, the more spread they make.

Be hedged

Hedging, in my dictionary, does not necessarily mean reducing risk. Hedging means having investments that are opposite in profile to your normal cash flows. If you are an entrepreneur or a significant part of your salary is via stock options or if you are in a high-risk job, your investments should ideally be safe. But in case you have a secure job with predictable cash flows, a significant part of your investments, I feel, should be risky, e.g. invest in penny stocks, invest in a start-up you believe in, invest in a highly volatile commodity, etc. Seems counter-intuitive to call a penny stock investment a hedge for a salaried employee? The rationale is very simple – most of the time you are financially unhappy actually relative. You see your childhood neighbor (who flunked Standard 8) driving a Mercedes! You start feeling that education is pointless, it kills your risk appetite and therefore disallows you the chance to be at the right place at the right time. So use your savings now and give yourself the opportunity to hedge the risk of not taking a risk. Invest according to your investment lifecycle Common knowledge says that with age risk appetite reduces. As your age increases, your percentage allocation in risky assets should be lower. Perhaps I happen to be a contrarian. When you start your career, invest even Rs. 5000 should be in relatively safe assets since it’s a big sum for you and you cannot afford to lose it. However as you progress, in case you are creating net worth at a rate faster than what is being eroded by inflation, you can potentially reach a stage when you are prepared to go to the next level in Maslow’s hierarchy of needs. At that moment, you should increase your risk appetite. However, if your progress is behind the inflation curve, then the old-age logic of reducing risk with age would definitely be more appropriate. You are the best judge to know where you stand and act accordingly.

Believe in yourself

Nobody, not even Warren Buffet, knows the definite outcome of the future. But sometimes you have a very strong sense of a particular investment. People typically call it gut feel. It can either be based on research or it can just be due to you being at the right place at the right time and having better access to information. I am sure all of us have had that so-called intuition a few times in life. I think this is life’s way of giving opportunities. Most knowledgeable people around you might feel otherwise and might dissuade you to invest in this “stupid notion”. Since your confidence in your own abilities to judge investments is low, you might finally give up. Don’t do that! Back to yourself and your instinct. Don’t bet your house on it, but if you have such a strong conviction, which in hindsight is correct, would you be able to forgive yourself? Would you then have any logic for not accepting the fact that the Standard 8 drop-out actually deserves the Merc while you do not?

Be adequately insured

When I was a child, I heard a very interesting comment. God was asked – “What is the most perplexing thing you find about life?” and He it seems had replied “Any instant there is at least one person dying in this world but if you ask anybody around you whether he/she is likely to be the next one, everyone, irrespective of their physical condition or age will reply – No, not me”. We human beings are eternal optimists; which is extremely good for the progress of mankind, but do we actually know what will happen to us tomorrow? So isn’t it better to err by being over-insured instead of being under-insured? Perhaps life is like the clichéd statement on cricket “a game of glorious uncertainties”. I feel it doesn’t pay to challenge fate – it perhaps is a bit like Murphy’s Law – “if anything can go wrong, it will”. Get insurance now!

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Author

Deepak Yohannan is the Founder & CEO of MyInsuranceClub. He enjoys writing on Personal Finance and focusses on explaining the basic concepts of insurance in simple language.