18 Mar Why People Fear Equities & The Role of the Financial Advisor
Our mind uses shortcuts to make quick decisions.
Often we find ourselves in situations where we need to make a quick judgment.
To help us do this, our minds have developed little shortcuts to help us immediately understand our surroundings.
Most of the time, these processes are very helpful, but the trouble is that our minds tend to overuse them.
Applying them in situations for which they aren’t suited can lead us to make mistakes.
When we are asked a “question” our mind tends to replace that “question” by one for which the mind already has an answer.
For example when asked : “That woman is a candidate for sheriff. How successful will she be in office?”We automatically substitute the question we’re supposed to answer with an easier one, like, “Does this woman look like someone who will make a good sheriff?”
This means that instead of researching the candidate’s background and policies, we merely ask ourselves the far easier question of whether this woman matches our mental image of a good sheriff.
Unfortunately, if the woman does not fit our mental image of a sheriff, we could reject her – even if she has years of crime-fighting experience that make her the ideal candidate.
Now it will be easier for you to understand why people stay away from “equity investing”.
When asked, “whether it is wise to invest in equities”, our mind wanders away from this question and substitutes it by another question of “whether it is wise to invest in stock markets?”
The mental image of the stock market for most people has been shaped by the commonly used words in all media which is,
“Investments are subject to market risk”
And the mind without doing any further research concludes that “equities” are risky and avoidable.
And the mind makes its own rule which is,
1) Either stay away from it
2) Treat it like a lottery, participate for a short while and test your luck.
And all of a sudden what is meant to be a long term investment either is completely ignored or treated like a short term speculative instrument.
Therefore, as a good Financial Advisor we should be aware of this and address it by educating potential investors about the the true meaning of market risk ; about how this risk is not about capital erosion but about volatility of investment in the short term and how over the long term it results in serious wealth creation ; wealth which outlives us and provides us protection & peace of mind.