Most Saturday mornings I find myself in and around Henley on Thames, ferrying the family about. Sometimes a spare thirty minutes presents itself, and I'll take the chance to have a coffee before the phone squawks and the taxi service is called back into action.
This was the case last week, when – in possession of the princely (but coffee covering) sum of £15 – I got a tap on the shoulder as I walked into the shop. This kind soul pointed out that I had dropped £5, and repatriated the cash forthwith. My elation (I’m Scottish) was short-lived, however, as it dawned on me that the £10 had gone, never to be retrieved. This minor incident truly spoiled my day.
The reason I’m giving you this unsolicited insight into my leisure time is that I believe my experience is analogous to that of investors at the present time. At work we call this the ‘happiness curve’. This hypothesis states that investors are delighted when they are making money on their investments, but disproportionately miserable when they suffer a loss. In other words, even a small dip can trigger a real sense of unhappiness but the equivalent gain will rarely generate the same degree of emotion.
So far, so obvious, you might say, but it is an important consideration when thinking about investment products – particularly structured products (or, as I prefer, protected investments). Most protected investments have a return profile that is aligned perfectly with investor sentiment, in the sense that people like making money but feel much better when they aren’t losing it.
Today, investors can exactly match their risk profile with one or more protected investments that should deliver to them exactly what they want, when they want it. (We should include in this the moribund precipice bond, which has – rightly – been superseded by genuine investment propositions which all have an element of investment protection built in.)
Protected investments have now progressed to the point where they make perfect sense for a lot of investors. The way I look at it is this: I might ultimately lose £10, but at least it remains with me longer. And that makes me happy.
Colin Dickie is director at Barclays Wealth.
The views expressed in this blog are those of the individual.
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