You may have met customers who want to invest in the higher risk investments, believing they will get higher returns. Whether they actually get it or not is a matter of luck. You may have also met customers who do not want high risk investments and are quite happy with bank deposits and traditional life insurance.
But do you know what is common between both of these two categories of customers? Both want to minimise their risks.
This is a fundamental truth of investment behaviour. Whether a person prefers high-risk investments or low-risk investments, each investor is worried about how risky an investment is within the risk category he seeks to invest in.
While returns excite a person and may get him interested in a proposal, his chief worry is how safe his money is.
Howard Marks, a successful investor and investment advisor, once said,
Risk is a bad thing and most level-headed people tend to avoid or minimise it. It is an underlying assumption in financial theory that people are naturally risk-averse, meaning that they’d rather take less risk than more.
As professional salesmen suppose you tell a prospect that a particular investment is not safe, do you think that the prospect will go ahead and invest his money in that very asset? Share brokers know this very well. They have to only tell their customers that a particular share is risky and most customers would not like to invest in it. But if the broker suggests that the company is well managed, and is likely to make profits, most of his customers will put in the money on that share.
Investors tend to minimize their investment risks within the risk class they belong to
What does this tell you? People fear risks more than they want returns or income. Suppose there were 2 prospects sitting in front of you. One is highly risk averse, while the other wants to take risks. And suppose you told the first person who is risk averse that a particular equity fund of a ULIP is risky investment because the market is currently very turbulent or volatile. The chances are that he will take your advice and will not invest.
What about the other person with a higher risk appetite? He will also have the same answer. Because you have told him the plan is risky.
Different persons in different risk categories will want to minimize the risks within their risk-class. Whether he is a big businessman or whether he is a salaried person. This is the reason that serious investors study an investment before making the investment – they all want to minimize their risks.
Read more about these issues in “Ignis Fatuus: The Delusions Created in you and for you by the Investment Sector”. Available on Amazon: https://lnkd.in/dR9yuJVQ