28 Dec Investors vs Quitters
We form perceptions about our investments largely based on experience of the journey rather than the experience of the goal.
The investment goal may be responsible for stimulating investment but the experience of the investment journey is one that helps the investor sustain the investment.
One must note that the investment journey rather than investment goal is crucial to retain clients.
It is noteworthy that in India, less than 10% investors stay invested for more than 5 years.
How does one then get the client to have a better journey experience and ensure that they become investors and not quitters.
One of the best approaches to explain such concepts is through the methodology of analogies.
For example, if a train were to start it’s journey and then gain speed and gradually start oscillating and swaying; first gradually and then violently.
The swaying and oscillating turns so very violent that the passengers begins to throw up and start feeling extremely sick. The feeling is like that of being seated in some kind of a roller coaster.
Soon the train approaches a station. Most of the passengers based on their extreme oscillating experience disembark from the train and decide to discontinue their journey.
The train operators inform the passengers that the train is designed for such oscillations and will reach the destination 25% faster.
But the passengers are a bit too petrified to go further.
This is the case with many equity investors. They flee the markets the moment they have their first jolt of volatility especially if it were to occur early in the journey.
Now imagine the train’s initial journey was smoother ; a little bumpy, a little oscillating but overall not very uncomfortable.
Because of a reasonable initial experience most passengers would decide to continue with their journey which in turn would ensure that they reach their destination/goal.
However to make this happen, the passengers would have to trade off comfort of the journey with the time duration to the destination.
Because of the extra comfort, it takes a little more time to reach the destination.
Because the passengers decide to continue with the journey they at least reach the destination albeit a little later.
Same is the case with investing.
One would rather invest in a hybrid fund like Balanced Advantage Fund or an Equity Savings Fund during times of high market valuation and /or high market volatility than investing in a multi cap or a mid cap fund
A couple of easy and peaceful years makes the investor comfortable with equity investing and as conditions improve and as duration increases, the equity proportion in the investment may be gradually increased.
As time duration increases the impact of volatility reduces and the effects of power of compounding begin to emerge.
Thus it makes ample strategic sense to trade off a little returns for the sake of staying invested for the long term and so that the journey is rather completed than quitting mid way.
Ensure that your client is a long term investor than an early quitter.