Source/Contribution by : NJ Publications
Over your journey as a financial advisor, you'll find two categories of investors:
1. The conservative ones And 2. The Aggressive ones
We'll be talking about the first category, the conservative ones, who do not want to risk a penny. This category generally has had a peaceful life by investing in traditional investment options like FD's, PPF, etc., and do not want to look beyond them. Their ancestors advised their children and grandchildren to protect their money by investing in these products, and probably they have taken the lineage too seriously.
So, how do you go about explaining to them the importance of Risk in Investing, that Risk and Return are two sides of the same coin, that for survival in this world they have to get over the obsession of traditional low risk products; is what we'll talk about now.
1. Evolution of Needs: Firstly, the conservative ones need to know that 20 or 30 years back, expenses and needs were limited, the scenario is totally different today. Mere protection of money will not help them sustain through their entire life. His grandfather's son did not demand an I-phone as his birthday gift, his son will. His grandfather saw airplanes on TV, he travels in one, his grandfather or father never traveled outside India, his son had his passport when he was a year old. The needs are not the same, they have evolved, so why should the investment be the same, the investments need to match with the needs in order to fund the changing lifestyle.
2. The Concept of Calculated Risk: Modern day lifestyle and consumption pattern does require more money, and more money comes for Risk. However, investing is not gambling, it does involve risk, but sane investing is about taking calculated risks, meaning taking risk after carefully estimating the probable outcomes. It involves doing a careful assessment of the investor's needs and aligning them with the risk in investing.
3. Start with Baby Steps: The risk element in each investment product is different. It may not be ideal for a Conservative investor to take the giant leap to an Equity Mutual Fund to begin with. There are options in Mutual Funds which cater to their requirements of low risk. They can start with a low risk product like an FMP, where the risk involved is super low, since the returns are predictable, and then gradually move to bonds, and then to balanced Mutual Funds, and lastly to Equity MF's.
4. Equity for Long Term investing: Another facet of risk that all investors, who are scared of Equity, must understand is the core of it. Risk in Equity is primarily driven by market volatility, which is short term in nature. Market Volatility is the resultant impact of the market sentiment, it can be positive sometimes and negative the other times. The impact of this volatility on Equity stocks is they can witness quick picks and falls, and this transition cannot be predicted, which puts the investor's money into the Risky zone. Meaning, if an investor has invested in an Equity Mutual Fund today, he can't be sure that after six months his investment's value will only rise, the volatility and the sentiment may not be working in his favour. But over the long term, the prices of equity are not left at the market sentiment's discretion, rather it is driven by the growth and profits of the underlying companies. So, when your investor is investing for his long term goals, he should choose Equity. Because firstly, it's only Equity that can help him achieve his Long Term goals, since Equity over long periods has generated superior returns and has been able to beat all other asset classes, the traditional ones don't stand a chance. And Secondly, the risk is neutralized over long periods.
So, the bottomline is many investors are conservative because of their inherent nature, because of bad experiences, scary anecdotes, and limited exposure, and thus they don't want to restrict themselves to their 'Safe Zone'. But what they are not realizing is the safe zone isn't safe anymore, because the circumstances, the rising prices, the lifestyle upgradation, increasing choices; demand more. You have to bring them out of their shell, and explain to them that not taking Risk is the biggest Risk they are taking.
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