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(Precious) Words of Wisdom : "Only those who are asleep make no mistakes." ~ Ingvar Kamprad

Keep bad investments away with IRR

Carpet bombing is on. Newspapers, magazines, radio, television, internet, social media, emails, etc., wherever you go advertisements will hit you... 
... insurance ads that proclaim to make you a stupendous fortune; 
... pension ads that promise you a dream retirement.

To be very frank, these ads are very alluring. They make an instant emotional connect. Hats off to the advertisement agencies and the copywriters!

However, my advice in ONE SIMPLE WORD would be -- AVOID.

In order not to create a bias against any specific product per se, I am not going into the details of any such plans. It would be sufficient to just state that, given the nature and design of such insurance / pension products, you will rarely make more than 5-7% returns. 

Clearly, you would be worse off by opting for them vis-a-vis the pure investment products (e.g. PPF, Post Office Schemes, MFs, Bonds, etc.) that not only yield better returns due to lower charges but also offer a lot more flexibility, better diversification and in some cases tax-efficiency too.

But don't take my words at the face value. Rather, I would insist that you spend just 5 mins in calculating the IRR (Internal Rate of Return) of such deceptively exciting schemes.

Why?

Because, I want you to see for yourself what poor returns lie behind such enticing and captivating ad campaigns. This will break the fantasy being created. This will bring you face to face with reality.  

If you don't know how to calculate IRR, I earnestly request you to learn it. You cannot afford not to know this one simple tool that will be a life-saver (and money-saver) on many (many) occasions.

Trust me, calculating IRR is extremely simple using MS Excel. All you have to do is to follow these 3 simple steps:


how-to-calculate-irr
How to calculate IRR

Step 1: Enter the years in one column 

Step 2: Enter the cash outflow / inflow pertaining to that year in the next column (outflows will be as negative numbers and inflows as positive numbers). 

Step 3: Go the end of this second column and apply the IRR formula. That's it. Done. The resulting answer will be the "real" returns that you will get.

IRR is one number that will save you from many bad investments.

[Note: I am sure you would want to save your relatives, friends, colleagues (and maybe even foes) from making bad investments. So share this post with as many of them as possible.]


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