In a recent discussion with a client, I noticed that he had kept money in liquid funds even as he was investing piecemeal in equities. He was doing this for over three years when markets had touched lows and were climbing. On why he did not want to invest the full amount three years back, even when he had earmarked the full amount for equities, he said that he did not want to see a 25% loss to his investments once he made them.
On the other hand, he invested regularly in equities in the conviction that his investments will grow. Now that is a contradictory statement as on one hand he is worried about losses and on the other hand he is confident of growth in equities.
The other important factor here is that a dip in his portfolio value even to the extent of 25% would hardly damage his lifestyle or his capability to invest. He has a strong income stream from his profession, has zero debts, owns property and is saving for the long term.
I find this quite prominent amongst many individuals with the similar characteristic of the client I am referring to here. In fact, the not wanting to see losses even if losses will not hurt and will eventually turn to strong profits is prominent amongst financial services professionals. Market savvy professionals tend to handle their personal investments in a way that does not do justice to their knowledge.
I discussed this investor behaviour with our Head of Online Advisory Service. She deals with all types of investors and she told me that as a rule, investors do not like to see drop in value of their portfolio even though they know that it will not hurt them in anyway. They tend to invest in sub par assets, get sold expensive products or buy property by default. Individuals who have made most of their wealth through ESOP’s too tend to be extremely wary of equities, knowing fully well that their management has made them wealthy through sheer performance.
It is all right for an investor who is highly leveraged or is retiring or retired or worried about job prospects to be risk averse. In fact such investors should be extremely cautious of where and when they invest. However investors who can easily ride market ups and downs, should not worry about short term losses as long as they are confident that markets will do well over a period of their horizon.
To be sure, at peaks of bubbles, many individuals who are fearful of markets would be highly invested as past returns will look good and when markets crash they will be left nursing losses, which they do not like to see.
The bottomline here is, if your lifestyle and ability to work is not hampered by losses to your portfolio, you should be fully invested in the asset class that you believe will deliver the best returns over the next few years.
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