Source/Contribution by : NJ Publications
We often complain about irrational investor behavior when markets are volatile and investors' investments start falling. Many a times investors attribute the fall to our product picking or may be mismangement of their portfolios, they accuse us for eroding their wealth. They don't want to continue investing or worse, want to redeem their investments to stop losing further.
While it is actually not our fault, but we are so helpless, we don't know how to pacify the whining investors, how do we explain to them it is natural for equity to keep falling and rising, and they need not worry since it is a notional loss only.
The unreasonable attitude is not just limited to volatile markets and tumbling investments, but also many a times we see investors willing to stop their SIP's in between, sometimes they want to withdraw their investments prematurely for buying an I-phone, and the like. We try to explain to the investor the need to focus on their goals, but somehow our logics are different from theirs. Investors don't pay heed to our advise and proceed with their inclinations, and we can't be over pushy also, since it is their money after all.
So, what do you do in such situations, how do you guide the investor and reinstate him/her onto the right path. The solution is to best avoid the situation from arising at the first place.
To begin with, it is your responsibility to show to the investor both sides of the coin at the onset of your journey with the client. “Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing.” The Disclaimer has to be loud and clear.
When you show them their dreams, when you show them how an investment can actualize that dream, it is very important to communicate that it's their conduct in between that matters, it's their conduct which accomplishes the dream in real sense. The conduct can be defined in the form of terms and conditions, the rules which the investor must adhere to with respect to the the investment. And once you have defined the rules, write them down, for anything which is written carries more weight and increases the commitment value. This activity must be done at the very beginning of your alliance.
The rules can for an investor can as be:
- My investment is for my daughter's higher education, which is 20 years ahead, and nothing will ever come between my goal and me.
- As my income increases, I will increase the SIP amount.
- I will not withdraw just because my investment is falling in value.
- I am an investor, not a gambler, I am here for the long run.
- I will not go for a vacation, by sacrificing my investment.
- My investment/redemption decision will based on my need, and not on tips from friends and acquaintances.
Likewise, there'll be different rules for different people, depending upon their needs and risk appetite.
Once you are through with writing down the rules, make sure the piece of paper is not lost in the investor's bedside drawers. You need to add weight to the paper, so that the investor is conscious of it's value. Have the rules typed in bullet points, give the paper a title, say “Investment rules for Mr Himanshu Mehta”. Both you and your client must sign at the bottom of the page. Keep one copy with yourself and hand over another to the investor. Lastly, have the paper framed/laminated and ask the client to put it at a place where he cannot avoid seeing it.
The above exercise of investment rule making plus having them written and presented well, will eliminate the likeliness of the investor swaying away from his duties towards the investment, it will make the investor more reasonable in his/her conduct. Still if the investor gets lost at any point of time, you just have to ask him/her to refer to the golden rules.
To conclude, these rules are for the betterment of the investor, and investors' needs evolve over time. Hence, although these rules serve as an investing protocol for the investor, which he/she must always follow, yet they aren't set in stone. So, you must revisit/redefine them to incorporate the changing needs of the investor.
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