Saturday, 16 November 2013

Will You, Won't You? Staying out of the markets is a costly way of reducing investor anxiety.

For some investors the idea of getting involved in the markets at all is uncomfortable.  This investor anxiety is quite common in those people who get the emotional comfort they need by avoiding investing altogether.  Yet being too hesitant has large hidden costs.

What if...?

Certain people have greater natural reluctance than others to enter markets in the first place.  We call this low Market Engagement, which measures the degree to which you are inclined to avoid or engage in financial markets, usually due to a fear of the unknown or getting the timing wrong.  It is a component of risk attitude and is one of the financial personality dimensions one need to understand.

Low Market Engagement can mean you are nervous of investing at the wrong time so you tend to stay out of the markets which is a costly way of reducing anxiety.  To overcome this you may opt to invest in a gradual, phased manner, normally starting with the lower risk asset classes.  Low Market Engagement investors may also value some protection against large interim capital losses for products in riskier asset classes.

Those with high Market Engagement can find it easier to commit to investments.  However this can sometimes lead to damaging enthusiasm where investors appear "trigger happy" with investments, giving them less consideration than is due.  Investors are also more likely to invest based on passing recommendations from people they meet.

Wealth and Investment Management.

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