Tamlin Russell

As many sports fans can attest, the disappointment when your favourite team loses can linger longer than the happiness felt from winning a game.

The same can happen when it comes to personal finances. There is a tendency for individuals to prefer avoiding financial losses to acquiring equivalent gains. For example, research shows that negative emotions are more severe over losing £100, than by gaining £100.*

This is called ‘loss aversion’, and if you’re a financial adviser, you may have seen many examples of this when interacting with clients.

The impact on savings and investments

Investing, particularly over the last couple of years, has its fair share of ups and downs. And when it comes to investing, it can be this rollercoaster ride that dampens client enthusiasm for investing their money to potentially achieve higher returns.

In our latest Wealth and Wellbeing report, we found that 38% of UK adults are too worried about volatility to invest.

Read our Wealth and Wellbeing report

But this aversion to loss can result in poor outcomes for savers. It can result in individuals deciding to sell successful investments ahead of those that have performed poorly, choosing overly conservative portfolios or cashing in investments during the middle of a downturn.

What can advisers do to mitigate the impact of loss aversion?

A financial adviser plays a key role in supporting their clients to make financial decisions that are right for them, and can be a crucial sounding board for clients who are nervous about fear of loss.

If this sounds familiar, what can you do?

1. Have a conversation.
   
   

   Reframing the fear of a loss to the impact of not acting can go some way towards helping your clients see the positives rather than the negatives. Emotion based decisions should be avoided when it comes to investing, and having a conversation can slow down nervous energy.

2. Emphasise that investing is for the long term.
   
   Encouraging clients not to constantly monitor short-term volatility and to save checking their investments for scheduled meetings can help to maintain focus on that client’s overall objectives.

3. Think about the suitability of products.
   
   You can use blended solutions, such as through an annuity and drawdown to de-risk your clients’ retirement journey. This can help individuals focus less on the volatility experienced with remaining investments that have the potential to produce higher wealth over the long term.
   
   Find out more about LV=’s blended solution
   

4. Reduce volatility through smoothed funds.
   
   There are investments that have the ability to reduce or smooth short-term volatility, such as the LV= Smoothed Managed Funds range. This can avoid the risk of short – term shocks leading to ill-thought out decisions.
   
   In exceptional market conditions (when the underlying price is 80% or less of the averaged or 'smoothed' price) the fund will typically be valued on the underlying price. Or, using our discretion, may be valued on the daily gradual averaged price with a shorter smoothing duration. We reserve the right to move to the underlying or gradual averaged prices at other times.

Over 2022, there was poor investment performance across a wide range of asset classes. For many people, their instincts will be to stop investing further and perhaps encash assets to avoid any further losses.

But in the investment world, patience is sometimes a virtue, and the help and reassurance of a financial adviser can be crucial in reducing the risk of making a decision that is later regretted.

Please remember that the value of investments can go down as well as up, your client may not get back what they have paid in.

* https://www.investopedia.com/terms/l/loss-psychology.asp