Finance and Economics Education for the Life Insurance Sales and Marketing Persons
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A very important aspect of the investor’s psychology is the concept of risk aversion. That is the desire to avoid or minimize risk in investments. Not all individuals will be prepared to take the same degree of overall risk of all their investments put together.
All investors do not carry the same degree of risk appetite
Investors differ from each other in terms of the overall portfolio risk they are willing to carry. Within any given group of persons the answers to risk aversion will show a considerable difference from person to person. Some will want 90 % of their investment in low risk investments; others will show a high degree of appetite for high risk. And you will find that all members of any given group will fall somewhere in-between.
This is because each person has his or her own degree of risk aversion. Sometimes this is also called as an ability to take risk or risk tolerance or risk preference or risk appetite. Whatever the term used, the meaning remains the same – all persons do not accept the same degree of risk on their overall investment portfolio.
Click on
https://www.helpindiainsure.iistpune.in/2018/12/07/this-is-a-fact-not-an-opinion/ for authentic RBI data on this.
It is useful to note here that 90 % of all savings by Indians is in low risk investment.What does this imply?
People want their money to be safe? People want their money secured? People are not willing to take risks? Indians are very traditional when it comes to savings? People do not have adequate knowledge about the financial markets? The media and financial analysts want you to believe that investors who invest in low risk investments are financially illiterate. But the actual answer to all these questions is both yes and no.
The answer is yes because it states the obvious. Why do I not take risks – because I want my money to be safe. It is so obvious. But the truth lies elsewhere.
An Individual’s time-horizon of investment planning is different
An individual (not a firm or company in business) has a limited productive life. For example, if the individual is a salaried person he or she can earn till age 60. Suppose this individual at age 50, after say 30 years of earning money, invests all of his or her money in high risk investments and suppose that there is a market crash and he or she has lost all that money at age 53. (In my personal experience this has happened to many individuals) Now the investor has only 7 years of productive life left. Is the investor in a position to recover all his or her lost savings built over a period of 30 years, in the remaining 7 years? Definitely not. This is the reason individuals are risk averse.
Very mischievous
Those selling mutual funds refer to their products as high return investments. They do not say it is a high risk investment. In fact mutual funds, by repeatedly calling them high returns, are set in public perception as high return investments. For the sake of protecting the investor’s hard earned money we should start referring to mutual funds as high risk and not high returns. Risk and returns are two sides of the same coin. Whether we call the investment risky or whether we state the possible returns on that investment it is one and same thing. But there is a world of difference in public perceptions. When by nature the investors are low risk and we sell them a high risk investment by comparing the high risk to a low risk, it amounts to the highest form of mis-selling. Especially when we claim high returns.
Investors are not Illiterate They are Financially Prudent
Individuals are not risk averse because they are illiterate, they are risk averse because their savings and investment planning horizon is limited to age 60. Beyond age 60, they can only live off their savings. And if the savings is in risky investments and they lose their money, they have no way of recovering the lost savings. We should not insult the investor by calling him or her financially illiterate. Trust me the financial analysts are equally illiterate going by the articles they write in the newspapers and magazines or discuss in TV talk shows. Examples of their illiteracy are comparing mutual funds directly with endowment products without adjusting for the risk in mutual funds (Read Article by clicking here) ; forecasting mutual funds returns on a linear scale and calculating the CAGR (Read Article by clicking here); projecting mutual funds as a long term investment (Read Article by clicking here) ; etc.
Degrees of risk in investments
Just as people have different degrees of risk aversion, you will find investments of different degrees of risk in the market.
Investments differ from each other in terms of the degree of risk they carry. For example investing in a post office savings scheme is less risky than investing in chit funds. Within some investment categories again the degree of risk varies. For example an investment in the bond fund of a ULIP is less risky than investment in an equity fund. There are also degrees of risk associated with various organisations where you invest. Or for example investing in the shares of a company that is not frequently traded on the stock exchange is potentially more risky than investing in the shares of a company that is traded daily.
Trading higher risks for higher expected returns
An Investor trades Risks for Returns
Investing is the art of trading higher risks and higher expected returns with actually earning the maximum possible returns in practice. It is like an investor is selling his or her risk appetite to buy returns. Sometimes you succeed, sometimes you do not.
Generally speaking we trade lower expected returns for less risk or higher expected returns for higher risk. Some people are happy with the bank rate of 7 %, while others may not. Others may want to take the risk of investing in shares in the expectation that the price will double in 4 years’ time.
Implications for the life insurance sales persons
When we meet our customers, we must discuss the risks in investments. Only when the risks of investments are discussed does the customer get clarity on where to invest and not get carried away by media hype and advertisements. The life insurance sales person should provide this clarity to the customer.
Sell Risks Not Returns
Returns are Uncertain, Risks are Certain
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