Often an individual takes decisions influenced by an inherent behaviour bias.
To name a few, behavioural biases can be loss aversion, outcome, recency, confirmation and emotional. At times, many investors take irrational decisions influenced by these biases. Without proper advice these investors may end up taking erroneous financial decision, which can jeopardise their financial journey.
Kalpen Parekh, President, DSP BlackRock Investment Managers speaks about common behavioural biases and how advisors can help clients overcome them.
Here is what he has to say.
Frame it right: Citing an example of two yogurt cups carrying message of ‘20% fat’ or ‘80% fat free’, he raised a question that which yogurt would you buy. Most people chose the second yogurt as they felt it was healthier though both of them meant the same. Similarly, advisors and fund houses should encourage people to stay put for the long term. He suggested that fund houses should tweak their application form by giving them long-term options such as 20 years and 10 years instead of 1 year and 3 years.
Laziness is bliss in investment: Tracking markets daily may prompt investors to churn their portfolio more often. However, investors should remain invested over a long term to create wealth in equities. A few years back, Fidelity sent an e-mailer to all their clients who made tremendous gains. However, no one reverted. Reason: All were dead. Lesson: Do not act. Let your money grow.
Help them spot the right opportunity: Many investors enter when the market goes up and exit when it declines. However, they do not understand that declining markets give better buying opportunities. The industry should tell people that they could buy more MF units with the same SIP amount. Advisors should encourage their clients to invest more when market gives such opportunities. So from today, do not worry and celebrate corrections by cutting cakes in your office.
Finally, addressing behavioural bias is a constant process and advisors need to keep on devising new strategies to combat these biases.
Share with us what strategies have you employed to ensure that your clients stick to their long-term financial plans and do not get swayed by behavioural biases.
