Many investors invest only in safe products due to the fear of loss. Other examples of loss aversion bias are - an investor selling his investments at a marginal profit fearing correction in markets and an investor holding on to a weak stock hoping that its price will go up.
Loss aversion bias causes investors to invest in less risky assets making them miss potentially rewarding opportunities. Such investors generate sub-optimal returns from their portfolio.
We spoke to a few advisors about clients with loss aversion bias. Here is how they helped them overcome it.
Vishal Dhawan, Plan Ahead Financial Planners
I remember a family invested majority of their corpus in just one company. The family was holding on to this loss making investment for years in the hope that the tide would turn.
I made them understand the opportunity cost if they stayed put. I told them that blocking funds in a loss making security means the money does not generate returns elsewhere. I also asked them if they would invest incremental corpus in the company and their answer was no. In fact, in my experience, clients are most likely to say no to such investments and agree to revisit their past mistakes.
Gajendra Kothari, Etica Wealth Management
One of the best ways to reduce risk of loss aversion is to introduce riskier investments in the client’s portfolio gradually. To start with, debt funds would be the first step for a risk averse investor. Once he gets comfortable with debt funds, you can gradually introduce equity portion in his portfolio through balanced funds. Finally, you can recommend pure equity funds to him.
One way to help client avert loss aversion is by showcasing your own investment portfolio. I remember a client used to invest Rs.1 lakh in mutual funds per month through SIPs. However, after investing for 6 months, he asked me if he should exit as he had a feeling that things could go wrong in future. I give him confidence by showing my own personal investments in mutual funds through SIPs.
