The reason behind investing is Fear and behind not investing is also fear. An investor invests because he fears he won't be able to meet his life goals otherwise. The investor does not invest because he is fearful of investing. Today we will talk about the latter, the bad fear, which hinders the investment process.
A crucial attribute that an advisor should work on, is understanding human psychology. The plain fact that what you are dealing with is a human being, explains the psychological significance. Humans base their decision making process largely on emotions, and you need to handle the investors' emotions with care. A major investing decision owing to emotions is “not to invest”. This decision can be based on a number of factors, and the investor's fear is a prominent factor, among others. Not investing will sabotage the investor's future, and it isn't good news for the advisor's business either. An advisor would have encountered many investors over his career who do not invest because they are too afraid of investing. And no matter how much gyaan on investing you give to them, or how good a salesman you are, things just don't work. He's adamant, “I am too scared, I don't want to invest”. So, how do we go about tackling such an investor? The solution to this dilemma is not an excellent sales pitch, but understanding the investor's psychology and helping him overcome the fear before advising him to invest.
The fears which haunt investors and keep them from investing are:
1. Fear of losing money: There are many investors who do not invest because they fear, they will lose money. And the fear of losing money is greater than the jitters one can get from watching the scariest movie ever. When the markets are high, these investors wonder what if the markets correct after they invest; if the markets are in the correction phase, then often a negative sentiment in the market don't let them invest. Such skepticism is often a result of bitter past experiences, warnings from friends and family, a timid nature of the investor, etc. So whats needed at your end is understanding the psychology, the root cause of the investor's fear and then provide a solution. You need to explain to the investor that if he does not invest, he will have to compromise on his life goals. And all investing products are not necessarily risky, so no point being scared of investing.
2. Complexity of the product: Sometimes the investor doesn't understand the product and thus stay away from it. Many investors do not invest in equities for instance, because they just do not understand its functioning. Lack of clarity has instilled suspicion and uncertainty among them, and this perception when extended over a number of years puts a highly resilient barrier to Equity's entry. So, in order to break the barrier, the advisor has to tame the investor's uncertainty by untangling the knots.
3. Wrong definition of enough money: “I do not have enough money to invest”, “I will not be able to continue investing”, “I will not win a war with such a small amount”; fear of inadequacy hinders many people from investing. What they need to understand is, there is no concept of “enough money” in investing, saving and investing is on the basis of a percentage of your income, no matter how small or big it is. The solution to such fear is “starting small”. A small SIP of Rs 500 or Rs 1,000 can be a good investing kick off for such an investor, and as income increases the SIP amount can also be increased.
4. Emergencies: Many times the thought of a cash crunch during emergencies won't let the investor invest. People keep a buffer for unexpected future needs, they feel if they invest the surplus, they won't have anything left to feed the emergencies. If the advisor is able to gauge this fear of the investor, it has a very simple solution, an insurance cover against insurable risks and an emergency fund with high liquidity to meet other contingencies. Once the investor is done with providing for emergencies, there will be room for investing.
The above are some of the most common investing fears, which can only be dealt with once you are able to relate with the investor's mindset. You have to understand his psychology, help him conquer his fears and then advise him to invest.
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