Is your client Risk Adverse?

A lot has been said and heard on the word "risk adversion"

But in my years of dealing with end investors, I realised that most of them are not risk adverse, rather I consider them "loss adverse".

Risk adverse refers to inability to tolerate even the slightest swing in the market. Loss adverse is another thing altogether.

Let's put this in mathematical terms:

Risk Adverse investor:

10% loss and 10% gain. A risk adverse investor will not tolerate his investment that swings between 10% loss and 10% gain although he know over time he'll be up 10% based on historical observations/experience. He magnitude of distress on 10% loss is the same has his magnitude of happiness over 10% gain.

Loss Adverse Investor:

same scenario: 10% gain and 10% loss. This investor is more distressed by the 10% loss than they are happy with an equivalent 10% gain. So he will lose sleep over 10% loss and yet when he has 10% gain, he is only marginally happy. And the fear of loss will make this investor having the tendancy to sell winning stocks while holding on to losing positions.

So, many a times, potential investors are not risk adverse, but they are loss adverse. Many advisers think their clients are risk adverse, but is most of the time not true, so understanding this physcology of investing will help to educate your clients and make them sleep well over their investments