Of late, in my sessions, I have been getting a lot of queries about bitcoins and cryptocurrencies. I recently addressed a group of middle-aged college teachers who were averse to investing in equities but were keen to start investing in bitcoins as the next best investment after real estate. When I informed them about the risks and tried to advise them against cryptocurrencies, I was met with disbelieving looks and the general attitude was of ‘we know it all’.
One of my co-worker’s 75-year-old uncle, who had invested in traditional investments all his life, called her to ask her to check if he had shortlisted the right funds for investment. All the funds being considered were the best performers of the past 1 year and included small-cap and sector funds. To make matters worse, he was planning to hold these investments only for 2-3 years. Despite her warning him about the pitfalls of this strategy, he invested in these funds saying they had given 30% returns in the past 1 year and even if there is some volatility, he would still make 15% returns.
What amazes me is that time and again people continue to make the same mistakes. They say they can’t take risks but buy at high and sell at low, driven by short-term returns on instruments simply because they feel they have lost out on past returns.
As a financial educator, I find people to be very defensive about their investment choices. The same individuals would be buying stocks based on advice from relatives or co-workers or based on stock tips on TV channels and websites. In these cases, good advice is not believed, as people want to justify that they have done the right thing. The same is true for traditional insurance investments. People don’t like hearing that they have invested in sub-optimal instruments, which had been the ‘go to’ investment for many decades. Generally, if the advice is in line with a person’s thinking, it is accepted; if it is not, then most would not believe it.
The issue is also that people like to hear about complex things. When they hear simple and good advice, they feel it is too basic. In my sessions, one of the most common questions is what is the right time to invest. And I am met with stares when I talk about remaining invested for the long term in simple instruments like mutual funds. Many investors are also looking at different products to invest into each time and find the thought of investing in the same product regularly, boring. Sometimes, individuals feel overwhelmed by matters of finance and are likely to do what they want to, despite getting good advice. With so much information on the internet and from other sources, people get confused, which leads to wrong decisions even though they may be getting the right advice, as is the case with my co-worker’s uncle.
Essentially, people don’t listen to good advice because:
—they feel they know better, even though they have no experience,
—they feel they have ‘lost out’,
—they don’t like hearing negative things about what they have invested in,
—they think complex-sounding investments are exotic, and
—they are confused.
Unfortunately, most investors learn the hard way and only a few actually make any change. Investors are happy to blame product manufacturers for losses, rather than their own behaviour. Most investors seldom think of a financial plan or goal-based investing. In the case of college teachers, when asked about their goal for investing in cryptocurrencies, the common response was: ‘to get good returns’. And this is the way most people invest in India, without a goal in mind. Unfortunately, the number of financial planners is low and investors are not willing to pay for financial advice.
While behavioural change is a slow process, especially for those who think they know it all, the right information from reliable sources can help those who are confused and are feeling lost. Towards this, a couple of things can be done.
—A central body, maybe the regulator, should have a simple chart showing the comparison of long-term investor returns on a risk-adjusted basis of various instruments. This should be published regularly in print and digital media. Since a central body would put this out, people would be more willing to trust the data.
—There needs to be a standard risk disclaimer across products. Mutual funds use “mutual funds are subject to market risk…”, and insurance uses “insurance is the subject matter of solicitation…”. How many people understand what this is? Ideally, there should be a common disclaimer used by all market-linked investments to make customers aware of the risks.
—Product manufacturers should keep the messaging simple and all advertisements should mention long-term investor returns and risks. This way, gullible investors will not be taken in by emotive advertisements.
—Give more impetus to get financial planners and financial educators in the industry.
—Give more importance to financial education during the college years. Currently, there is little focus on this and the government or the regulator needs to ensure that the critical subject of personal finance is included as part of the curriculum.
In the meantime, financial advisers and educators should take heart from this Agatha Christie quote: “Good advice is always certain to be ignored, but that’s no reason not to give it.”
Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra.
*Photo credit: iStock
Source: Article written by Mrin Agarwal in Livemint on Sep 06, 2017